USDA

m

United States

Department of

Agriculture

Rural

Development

Rural BusinessCooperative

Service

RBS Research

Report 167

Contemporary

Producer-Owned Lamb

Processing Ventures

Lessons Learned
The U.S. sheep and goat industry is in transition. Its producers have been forced to

adjust to a more market-oriented environment with less Government income support,

more international competition, and increased market concentration beyond the producer level.

In trying to realize higher returns for the lamb production enterprise in the early 1990s

many lamb producers became involved in group projects that had value-added processing and marketing through vertical integration as the primary way to capture more

of the consumers’ food dollar. Most were unsuccessful.

Spokespersons for the U.S. sheep and goat industry, while not being critical of the

unsuccessful ventures, believed that lessons learned from these business failures

could greatly benefit future vertical coordination efforts in the lamb processing and

marketing arena.

A case study approach was used to evaluate two producer-owned venturesAmerican Lamb Producers, Inc. and Virginia Lamb Cooperative. Findings from these

case studies have relevance in determining the potential for future producer-owned

ventures into value-added lamb processing and marketing in an industry characterized

by significant concentration among a few established marketing firms.

Keywords: Lamb marketing, processing, cooperatives, case study approach, vertical

integration.

Contemporary Producer-Owned Lamb Processing Ventures: Lessons Learned

Roland D. Smith, Edward G. Smith, Ernest E. Davis,

Richard A. Edwards, and Gustav0 Molina.

Department of Agricultural Economics

Texas Agricultural Extension Service

Texas A&M University System

RBS Research Report 167

February 1999
Preface Sheep producers faced substantial frustration during 1989-91. While lamb prices at the

farm and ranch level had plummeted, producers observed that retail prices for lamb

had not fallen accordingly-if at all-resulting in relatively large farm-to-retail price

spreads for certain lamb cuts. Several groups of lamb producers across the country

attempted to capture a part of this marketing margin by establishing producer-owned

processing ventures. For a variety of reasons, many subsequently failed.

Sheep industry leadership suggested a study of some failed value-added ventures

could categorize key pitfalls to avoid for producers involved in future vertical coordination efforts in lamb processing and marketing. This report provides a detailed view of

the organizational processes and business actions of two unsuccessful producerowned lamb marketing ventures-American Lamb Producers, Inc. and Virginia Lamb

Cooperative. The first was organized as an investor-owned firm and the second was

organized as a cooperative.

The study is partially funded under a cooperative research agreement with USDA’s

Rural Business-Cooperative Service (RBS) with support from the American Sheep

Industry Association (ASI) and other State producer groups. State and Federal agencies working with the sheep industry also are interested in identifying market alternatives that might enhance industry competitiveness in light of reduced direct

Government price and income support to the producer.

In conducting the case studies, the authors met personally with many of the key participants in the two ventures. Individuals interviewed were those involved in the conceptual development, investment, and/or management of the venture. The study focuses

on: 1) the organizational background for the development of each failed venture; 2) the

factors that may have contributed to the failure; 3) any positive outcomes as a result of

the venture; and 4) the challenges facing producer-owners of similar ventures into vertical coordination. While the case-analysis approach used in this study requires some

interpretation by the authors, the responses of participants to these four major areas of

inquiry were consistent.

The authors acknowledge assistance received from other agencies and individuals in

this study and, in particular, the principals in the two lamb processing ventures. While it

was surely not easy to discuss the shortcomings faced by the organizations into which

they committed either significant financial or human capital (or both), the candidness of

the producers involved aided this study. Background information provided by RBS

economists also was essential to the completion of the study. This publication was prepared under a cooperative agreement between Texas A&M University and Rural

Business-Cooperative Service, United States Department of Agriculture.
Contents

ii

Objectives and Methodology .............................................l

Objectives ........................................................ .

CaseStudyApproach ............................................... .

Methodology .......................................................

Industry Background Information ..........................................2

External Environment ...............................................2

Value-Added Lamb Products .........................................4

Common Causes of Business Failures ..................................5

American Lamb Producers, Inc. (ALPI) .....................................5

BriefOverview .................................................. ...5

ALPI:TheBeginning ................................................ .

Positive Results ................................................. ...8

Internal Environment ............................................... .9

Management ................................................. .

Marketing and Distribution ...................................... .9

Operations..................................................lO

Finance .................................................. ..ll

Accounting and Controls .......................................12

SenseofUrgency ............................................... ..12

Conclusion .................................................... ..12

Virginia Lamb Cooperative (VLC) ........................................12

BriefOverview....................................................l 2

VLC: Pre-formation Organizational Process .............................13

VLC: Pre-formation Feasibility Analysis ...............................-13

ProducerCommitment ........................................... ..14

Positive Results ...................................................14
Contents Internal Environment ...............................................15

Finance................................................_......15

Management ................................................ ..15

Marketing and Distribution ........................................15

Product Supply Issues ...........................................16

Loss of Key Processing Facility ....................................16

Conclusions......................................................l 6

Comparisons and Contrasts ............................................16

References ...................................................... ..17

. . . 111
Contemporary Producer-Owned Lamb

Processing Ventures: Lessons Learned

Roland D. Smith, Edward G. Smith, Ernest E. Davis,

Richard A. Edwards, and Gustav0 Molina.

Department of Agricultural Economics

Texas Agricultural Extension Service

Texas A&M University System

During its current transition period, sheep and

goat industry producers have been forced to adjust to

a more market-oriented environment. In trying to

improve farm and ranch profits, many producers

joined group efforts using value-added processing and

marketing to capture more of the consumers’ food dollar. Eleven lamb producer groups were formed in 11

different States between 1989 and 1992 with that objective in mind (Kirkpatrick, 1).

A few of these 11 ventures had some limited success, while the rest failed. Sheep industry leadership

asked for a study on some of the failed ventures so

that producers participating in future efforts into vertical integration might learn from the experiences. The

request was proactive-the industry was not critical of

the failed ventures. Industry spokespersons believed,

however, that lessons learned from the business failures may be more helpful than those from the limited

successes. Two such attempts into value-added processing and marketing were chosen for this studyAmerican Lamb Producers, Inc. (ALPI) and Virginia

Lamb Cooperative (VLC). ALP1 was established as an

investor-owned firm with most of the stock shares controlled by lamb producers. VLC was organized as a

producer-owned cooperative. This report gives a more

detailed view of the organizational process and business actions taken by two unsuccessful lamb marketing ventures.

The study was encouraged by both the American

Sheep Industry Association (ASI) and the Texas Sheep

and Goat Raisers Association (TSGRA). State and

Federal agencies working with the sheep industry also

are interested in identifying market alternatives that

might enhance industry competitiveness now that

direct Government price and income support to the

sheep and goat producers has been eliminated. The

termination of supports has forced producers to derive

their total revenue in markets where significant competition occurs from other meats and fibers and in

which a few established firms dominate. Lessons

learned from these case studies may help determine

the potential for future producer-owned ventures into

value-added processing and marketing.

Objectives and Methodology

Objectives

The objectives of this study were to: (1) provide

an organizational background for the development of

each failed venture-ALP1 and VLC; (2) indicate the

contributing factors; (3) present any positive outcomes

from the venture; and (4) provide an insight into the

challenges facing future producer-owners of similar

ventures.

Case Study Approach

One of the most effective investigative forms

used by social scientists is the case-study research

method. Yin says this method is appropriate when the

investigative team wants to (1) define topics broadly

and not narrowly; (2) cover contextual conditions; and

(3) rely on multiple and not singular sources of evidence.

Using the case methodology provides an opportunity to learn from an actual business situation. An

effective case study provides the most relevant information about a single or series of events that indicate

what might have influenced decisions or the results

thereof. The use of personal interviews is the standard

research tool for case studies. Data collection also

includes company documents and relevant market

trends at the time.

1
Methodology

A case study approach was used to collect and

analyze firm and industry information on ALPI and

VLC about: 1) pre-formation organizational process; 2)

pre-formation feasibility analysis; 3) producer commitment; 4) economic and management performance; 5)

areas of success; and 6) factors contributing to their

closure.

Observations were obtained from investors and

management in the businesses and any other individuals that were knowledgeable about the history of these

two lamb marketing ventures. These included individuals primarily involved in the conceptual development

of the venture, investment and/or management of the

operation such as former managers, board members,

other producers and/or investors, and retailers. Others

knowledgeable of the venture included lenders,

Government agency representatives, land-grant

research and Extension faculty, association representatives and consultants.

The questions used by the investigating team

focused on five main areas (table 1). The first question

revealed the individual’s involvement with the organization. The second group of questions (2-9) sought

insight into how the concept was developed and its

feasibility explored. Question 10 asked what positive

results were derived from this venture. The fourth set

of questions (11-14) asked why the venture failed. The

final set of questions (15-17) were used to learn if the

failure had discouraged individuals from participating

in future producer-owned lamb marketing ventures.

The questions in table 1 were only a guide. The

discussions followed their own path based on the

knowledge and the involvement of the interviewees.

Once completed, the responses were aggregated with

those from other individuals to obtain the summary

statements. The conclusions presented here draw on

consistent themes evident in opinions presented.

The pre-implementation business plans of the

two organizations were used as initial sources of information. Some of each organization’s internal documentation, such as memorandums, proposals and

financial projections, also were reviewed by the investigators in preparation for conducting the in-depth

interviews.

Industry Background Information

External Environment

Sheep producers were very frustrated during

1989-90. Their industry was losing market share to

other competing meats. Since 1960, the industry’s

share of total red meat production had decreased from

nearly 3 percent to less than 1 percent (USDA/NASS).

The number of sheep in the United States also had

declined from 13 million head in 1981 to 11.4 million

head in 1990 (figure 1). An AS1 analysis indicated that

the number of operations with sheep and lambs

decreased from 112,290 in 1988 to 105,640 by 1990-

down 6 percent.

The Texas Agricultural Market Research Center

(TAMRC) study team attributed several factors to the

sheep industry decline: (1) lower returns and higher

risks compared with other livestock and crop enterprises; (2) high wages and scarcity of qualified labor;

(3) uncertainties in U.S. and foreign trade policies; (4)

uncertainty surrounding the U.S. wool incentive payment program and grazing allotment policies for public lands; (5) restrictions on predator control; (6)

greater technological development in competing meat

processing industries; and (7) shifts in consumer tastes

and preferences toward leaner meats without the distinct flavor often associated with lamb.

Both sheep numbers and lamb slaughter capacity

declined 30 percent between 1960 and 1990 (TAMRC,

11). The producers were facing an increasingly concentrated market channel. In 1984, the four largest packers

in the U.S. accounted for almost 52 percent of the total

lamb slaughter and had increased to 74 percent by

1990 (Davis).

Producers saw themselves as vulnerable. With

declining market share, some of the lamb packing

plants could easily convert to other species such as

pork. If the packers did this, it could leave the sheep

producers in many regions without an effective market

for their raw product. It was also perceived that some

of the packers and feeders did not support a recently

established lamb yield-grade system because of the

projected impact it would have on their operations.

Producers believed that the older grading and market

structure would not provide the mechanism for producers to be paid a premium for higher quality carcasses.

Producers believed that packers would not pursue higher wholesale and retail returns from lamb and

sheep products because of their relatively minor position among competing meats. Under the AS1 umbrella,

a lamb industry task force was ,formed to “jump start”

the industry. Producers, feeders, and packers were represented. Producers wanted to gain more control of

their product-and thus their industry-by getting

more involved in lamb marketing.

2
Table I- InterVieW question guidelines for the two case’studies

1. What was your professional relationship with the venture?

2. How did the idea for the value-added enterprise originate?

3. What pm-formation organizational structures were examined?

4. What pm-formation feasibility analyses were conducted and by whom?

5. What was the expected producer commitment to the project?

6. Who selected the marketing study firm, if one was used?

7. Did you have any input into this study?

6. Did you or anyone else review the marketing study? If yes, did you raise any questions about the study? If yes, how were

the issues resolved?

9.

10.

11.

12.

13.

14.

15.

What differed from the marketing plan and actual operations?

Were there any success stories that can be attributed to the venture in which you were involved?

What were the major factors that contributed to its closure?

When did these factors first appear?

What changes could have been made to correct these problems?

If you could start over, what would you have done, or liked to have seen done, differently?

Do you feel that producer-owned value-added ventures have a chance for success in the lamb carcass-to-retail marketing

chain?

16. Would you invest in a newly restructured venture?

17. Who else would you suggest we vist with about these issues?
Figure I- U.S. Sheep and Lamb Inventory 1980-97

Million

6 ’

I I I 1 I I I I I I I I I 1 I I I I

1980 81 82 83 84 85 88 87 88 89 90 91 92 93 94 95 96 97

Value-Added Lamb Products

To compete successfully with other lamb marketing competitors, producer-owned ventures must have

a strategy in place to: 1) obtain a consistent lamb supply of the right quality; 2) be technically efficient; and

3) assure product buyer and producer/owner satisfaction. Development of the market and product promotion must be pursued in tandem with an efficient and

effective distribution system for the value-added products. Value-added production has the potential for

increasing producer returns by making lamb more

attractive to consumers, but the retail market for meat

is very competitive and the producer-owned venture

must be well organized and capitalized to compete.

When considering a new source of lamb carcasses, commercial lamb buyers look at supply consistency

as the most important factor (Kirkpatrick, 11). The

buyers must be assured of a reliable source that can

meet their quantity demands. Three important factors

to the commercial buyer are: 1) consistent quality

product; 2) a year-round supply; and 3) prices that are

competitive with other sources of supply or can be justified through product characteristics (Kirkpatrick, 13).

Consumers also demand a consistent-quality product.

U.S. meat consumers prefer products that have similar

characteristics every time they are purchased. To be

competitive in the U.S. meat trade, lamb value-added

ventures may need to process only lambs meeting specific requirements (TAMRC, vii). One good way to

ensure standardized quality is to make sure the consumer receives meat that has been graded to specifications. Investment in research to improve lamb’s uniformity must be made if the industry is going to prosper

(TAMRC, 198).

Cooperatives and other producer-owned ventures

need to promote their product to the potential end-user

customers by: 1) in-store demonstrations; 2) point-ofpurchase materials; 3) spot sales; 41 giving the product

a unique brand name; and 5) developing a niche market. There are different ways to develop niche markets.

The most common ways of product differentiation are:

4
1) lean meat niche; 2) organic lamb niche; 3) gourmet

cuts; 4) religious certification processes; and 5) regional identity niches (Kirkpatrick, 9).

A key to profitability is to have a well-developed

plan regarding the operation of the venture. Despite

the benefits, the cost of developing, packaging, and

marketing value-added products is cost-prohibitive to

most lamb marketing ventures because needed equipment and facilities are expensive (Kirkpatrick, v). To

overcome this problem, partnerships, joint ventures,

or strategic alliances can be established with existing

packers. The producers then would only be responsible for breaking the carcasses and marketing them. To

be profitable, the large fixed costs must be spread

across a large volume of lamb. Accurate and complete

financial records are necessary if management, the

board, and members want to evaluate the performance

of the venture (Kirkpatrick, 17).

Lamb is traditionally marketed in whole carcasses and, to a lesser extent, primal cuts. The latter

requires use of a pricing formula for the popular cuts

and locating alternative markets for the slower-moving cuts. Any meat processing organization must effectively market and price all of the carcass or primal if it

is going to increase returns to the owners. This was a

serious problem for both ventures studied.

The sheep industry needs to adopt an integrated

consumer orientation for lamb marketing, merchandising, and promotion activities. Thorough research of the

consumer perceptions towards lamb products must be

done so an effective marketing plan can be developed.

To be successful, all key players in the lamb industry

must come together to reach a consensus on the strategic marketing and promotion goals and to develop the

plan to follow (TAMRC, 228-9).

Common Causes of Business Failures

Many factors cause businesses to fail in the early

stages of their existence. Haass cites seven most common causes:

l Poor business plan. Many businesses start out

with a good idea but fail to find a good location, fail to

research their market, or fail to ensure that they have

enough money to adequately cover startup operations

and meet competitive pressure.

l Overly optimistic management. Hopes and

dreams drive the entrepreneur’s spirit, but also can

lead to unrealistic goals for market penetration and

production costs.

l Too much manager time on administrative

problems. This problem is more prevalent in small or

limited-resource startups due to the inability to

employ enough special-skilled people to focus on key

business functions such as marketing, operations management, procurement, and finance. As the company

grows, management needs to be able to delegate tasks

to others so more time can be spent directing the overall operation.

l Deteriorating quality of product or service.

Failing to satisfy the customer will cause the business

to fail.

0 Over-reliance on a single customer or supplier. Relying on a major customer, supplier or technology places the business in a high-risk situation.

Contingency planning is a must to manage this risk.

l Large fixed expenses. The accumulation of

fixed expenses can overwhelm a new business and

affect its growth and operational efficiency.

l Inadequate cash flow. Start-up cash flow problems is a leading cause of business failures.

In addition to exploring other areas, the casestudy research specifically assessed these common

causes of failure within the two unsuccessful lamb

marketing ventures.

American Lamb Producers, Inc. (ALPI)

Brief Overview

American Lamb Producers, Incorporated (ALPI),

shut down operations in February 1993- about a year

after it began. ALPI was a producer-owned corporation with the goal of processing, packaging and marketing the highest quality lamb cuts to retail, food service and export segments of the industry. ALPI

evolved from a concept discussed at an AS1 meeting

for identifying solutions to perceived industry problems.

The concept centered on producers, in a group

effort, countering the generic commodity focus in lamb

marketing by developing a value-added product with

a recognized brand name. When asked about any success stories that could be attributed to the failed venture, producers quickly pointed out the knowledge

gained from the marketing experience and the

advancement of processing technology to supply caseready products to the retail market.

Startup debt capital was obtained both from

loans extended by commercial banks and guaranteed

by a State agribusiness loan authority as well as loans

from producers and producer guarantees. Equity capital primarily was provided by ranchers, feedlot owners, and agribusiness firms in sheep-affiliated businesses.

5
Although the venture failed and significant

investment dollars were lost, industry leaders kept

their entrepreneurial spirit. The majority of investors

interviewed believed that the venture was a known

high risk from the start and that they went into it with

a “research and development” point of view rather

than with a strict “bottom line” business approach.

The case-study analysis suggests several reasons

leading to the company’s failure-lack of management

expertise in many key areas, overly optimistic market

expectations, financial and operational difficulties, and

limited tangible support from the industry. These, coupled with a reversing trend in market prices, forced

the company to shut down operations. For future lamb

marketing ventures to succeed, these problems must

be addressed and overcome.

Individuals interviewed for the ALP1 case study

included 12 investors (four of which were members of

the board of directors), three former employees, three

representatives from retailers that purchased ALPI

products, two consultants for ALPI, and four individuals who knew how ALP1 was created and operated,

even though they were not actively involved.

ALPI: The Beginning

In late 1989 and early 1990, lamb producer leadership held several meetings at ASI headquarters in

Denver to discuss alternatives for more aggressive promotion and marketing of their product. The concept of

developing a consumer-ready product was introduced

as an avenue to add value and maintain competitiveness with other meats. To accomplish the vertical integration needed for processing the value-added products, the purchase of an existing packing plant was

considered. This approach would have the added benefit of assuring that adequate slaughtering capacity

would remain for the industry. This option was dismissed, however, due to concerns that the new venture

might not be able to effectively compete with the traditional packers in the area.

Declining lamb prices at the producer level in the

last quarter of 1990 and first quarter of 1991 (figure 2)

provided increased incentive and a sense of urgency

for the lamb producers to pursue the idea of a valueadded product even though the direct purchase of a

lamb packing facility was not considered feasible.

Other approaches were considered to implement the

Figure 2- San Angelo Choice Slaughter Lambs, Q&115 Ibs., January 198Q-January 1994

Dollarslcwf.

80

75

70

65

60

1989 9 0 9 1 9 2 9 3 9 4

6
concept. Based on the success several companies have

had in the poultry and processed meat industry, lamb

producers believed that their product had more market potential than the current market system was likely

to develop. Most producers agreed that the alternative

chosen should be producer-owned and controlled.

The question then was whether the producerowned venture should be organized as a cooperative

or as an investor-owned firm. Advisors from USDA’s

Rural Business-Cooperative Service (RBS), the

University of California Center for Cooperatives at

Davis and the Bank for Cooperatives (CoBank) assisted AS1 in considering formation of a marketing cooperative. If formed, the cooperative would be obligated

to look to its members for a majority of the lambs to be

processed. The producer leadership was concerned

about this obligation because a standardized product

was so important to the success of a case-ready, branded product.

The new venture, therefore, needed to stay flexible regarding the suppliers of lamb, its quality, and

geographic origin. It was decided that a startup cooperative could not provide this flexibility. Also, the

expectation was that outside equity capital eventually

would be necessary to fully fund the planned activity.

The cooperative practice of distributing profits based

on volume of use rather than equity then could cause

funding problems if producers were not able solely to

provide the equity necessary to initially capitalize the

venture. Thus, concerns regarding consistency of a

quality supply and anticipated problems of raising

equity capital contributed to the decision to organize

the lamb-marketing venture as an investor-owned corporation, albeit with most of the stock owned by lamb

producers.

Justification for organizing the venture as an

investor-owned firm versus a cooperative centered on

the following: (1) it would not limit the firm to processing primarily member-supplied carcasses; (2) it

would permit paying a premium for carcasses that met

the required quality specifications; and, (3) the venture

could attract a broader investor base of producer and

non-producer representation. This latter reason also

could foster increased industry support by receiving

less criticism for being geographically concentrated in

one production region.

ALPI was incorporated June 22,1991, as a forprofit, producer-owned-and-directed Colorado company. A board of directors composed of producer leaders

from each of the seven ASI regions was formed. The

owners established the following objectives for the

operation: 1) provide producers a mechanism to have

more control of their destiny; 2) supply customers at

all levels with high-quality lamb; 3) develop and use

technology that would become an example for the red

meat industry in the future; and 4) provide investors a

return on their investment and increase the economic

return for the lamb production enterprise. The management team was planned to include a

president/CEO, a vice-president of operations, a director of finance, a director of marketing/sales, and a

plant manager (ALPI, 18). By October 1991, a market

feasibility study was developed with the aid of ASI.

To make their idea a reality, the leadership

obtained startup funds from various sources and in

two phases. Money raised in the first phase was used

to set up the organization. A selected group of producers were asked to provide the capital necessary to form

the company. At a later date, the funds obtained from

these producers were converted to stock at a price of

$500 per share. The equity capital collected in the second phase was used to help acquire the building and

equipment and for working capital. These equity

funds from producer-owners also were converted to

stock at a price of $500 per share.

The finance plan also called for obtaining significant additional equity capital through stock offerings

to the general public. Considerable management time

and expense were invested in attempting to get

Securities and Exchange Commission (SEC) approval

for this financing approach, but without success. Thus,

most of the equity capital in the venture did come

from producer-investors.

Initial debt capital came from a commercial bank

loan that was backed by a special loan guarantee program for value-added agribusiness ventures administered by a State department of agriculture. A number

of additional loans also were obtained by ALP1 during

this period. The collateral for these loans included the

plant, equipment, a second lien against the

land/building, and irrevocable guarantees from lamb

producers.

Immediately after the decision was made to

develop case-ready lamb cuts for retail and restaurant

markets, the search for a processing facility began.

Again, there appeared to be a sense of urgency to get

the venture moving forward as fast as possible to

relieve the economic stress faced by producers in the

lamb market. Five to six different plant locations in

Georgia, Pennsylvania, and Texas were considered.

Selecting the site was primarily the responsibility of

management.

The facility eventually chosen was located in

Manor (near Austin), TX, and previously was a beef

7
processing plant for Taco Bell franchises. The plant

was selected because: (1) it had access to a large consumer base within a 200-mile radius (15 million people

mainly in the Dallas/Fort Worth, Houston, San

Antonio and Austin areas, figure 3); (2) it was relatively close to the Texas lamb producing region; and (3) it

was a modern facility that was already in place.

The president and the vice-president of operations were responsible for bringing the facility up to

Federal standards and ensuring that all the necessary

equipment was obtained. Cryovac’s 2132 retail-gasflush system was selected because it could ensure the

quality of the case-ready product and the equipment

could handle a large volume of lamb carcasses. After

the plant site was chosen and the key equipment was

purchased, operations began on Feb. 14,1992. Mint

Valley Lamb was chosen as the brand label for the

product line.

Positive Results

Although the venture was not economically successful, some positive results were cited by the respondents. The learning experience for the producers gave

them a much clearer vision of the lamb market complexity. ALPI also provided the experience of pursuing

a niche market. Most of the original investors said they

would again invest in a future lamb marketing opportunity if ALPI’s problems were appropriately

addressed.

Most producers said one positive result of the

venture was the technology used to develop the caseready product. Food retailers are aware that lamb represents a small share of their total meat sales. But, after

working with ALPI, they were willing to attempt the

market concept of providing the consumer with highvalue, pre-packaged lamb cuts. Using the gas-flush

package system extends the meat product shelf lifean added incentive for retailers to market lamb.

Many mentioned that meat cutters dislike handling lamb and that the merchandising function suffers as a result. Although retailers said it was not necessary to provide the cuts in gas-flush packaging, they

did say it was important to pursue the concept of a

case-ready lamb product. An important result of this

venture is that a number of packers now offer consumer- ready lamb as part of their product line.

When ALP1 received correctly certified carcasses

in the right quantity, it could provide a high-quality

product to retailers. Even though sales never reached

the desired level, the limited results suggest that the

Figure a- The Primary Texas Lamb Marketing Area

l San Antonio

8
consumer may be willing to pay a premium for a highquality product like Mint Valley offered. Managers

were satisfied with the certification program recently

implemented by USDA.

ALP1 was an innovator in at least two areas. First,

it introduced a branded case-ready lamb product. The

industry use of some of their technology now indicates

the process was truly innovative at the time. Secondly,

ALPI’s strategy was to set up overall operations close

to the consumer market instead of close to the source

of supply. The time lag from slaughter to packaging

that resulted from the necessary transportation from

production regions to the processing facility, however,

tended to offset some of the advantages of the gasflush system. Processing the product near the packing

plant would have reduced the time between kill and

gas-flush packaging and increased shelf life.

Although significant dollars were lost in this

failed venture, most of the original investors said they

would be interested in pursuing another value-added

venture if given the opportunity. They said they knew

up front that ALP1 was a high-risk venture, but it was

a way to move the industry forward and establish a

producer commitment in the product market rather

than remaining just a commodity pricetaker.

Something had to be done, producers said, due to

the adverse trends in the sheep industry and the

expectation that lamb marketing innovation was not

going to come from the existing participants in the

marketing chain. The principals in ALPI felt that if

declining lamb consumption was going to be turned

around, the producers would have to become the catalyst for change--even at a high risk to the producerinvestor. Therefore, many of the investors made the

investment decision more from a long-run “research,

development, and market promotion” perspective

rather than from a stand-alone “bottom-line” business

decision.

Internal Environment

Many factors have been suggested as the cause

for ALPI’s failure. While no one factor can be pinpointed as the sole reason, all of them acting collectively

contributed to the ultimate shutdown. The factors

mentioned by the individuals interviewed can be categorized into five main areas : 1) lack of management

expertise in some areas; 2) deficient marketing and distribution; 3) operational problems; 4) lack of adequate

financing; and 5) being overly eager to begin operations without proper planning and evaluation of the

alternatives.

Management-One problem leading to ALPI’s

decline was the lack of management experience and

expertise in key areas. While experience in sales and

promotion likely was adequate, it was lacking in operations management. Factors cited were the lack of control in the production process, conflict among employees, poor coordination, poor data and information

management, and lack of employee motivation.

Marketing and Distribution-ALPI’s business

plan had these goals: 1) becoming a reliable supplier of

high-quality branded-lamb products; 2) becoming the

leader of processed- lamb products; 3) doubling its

sales in the first year and establishing new facilities to

expand; and 4) establishing itself as a good member of

the Texas business community and a fair employer. In

their sales effort, they set these optimistic goals: 1) gain

33 percent of the Texas retail lamb market; 2) have

sales in the States surrounding Texas; 3) develop markets in Mexico and the Caribbean; 4) develop specific

branded-food service products; and 5) develop preseasoned and precooked lamb products (ALPI, 16-17).

ALP1 appeared to focus its marketing efforts primarily on merchandising the primal cuts and did not

have a strategy concerning the disposition of the offcuts (the remainder of the carcass that was not a part

of their targeted sales effort). Competitive forces in the

marketplace, however, make it necessary to merchandise all parts of the carcass instead of just focusing on

the primals. By December 1992, ALP1 was losing $29

per carcass because the non-primal parts were not

being sold. The only means of compensating for the

lack of non-primal sales was to charge a higher price

for the primal parts. That made ALPI less competitive

with other suppliers.

The management team appeared to believe a

quality product would sell itself. They failed to look for

specific markets in which their product could succeed.

They concentrated their effort in the Austin area and

surrounding cities within a 200-mile radius-Houston,

San Antonio, and Dallas/Fort Worth (figure 3).

The management team did not appear to focus on

establishing key business relationships with brokers

and/or retailers in Texas. Without that, ALP1 did not

appear to develop consistently loyal customers. A

major chain store in Texas used ALP1 for a trial period.

ALPI, however, was unable to cash in on this opportunity because they could not get enough carcasses, with

the required specifications, to consistently meet the

store’s orders.

In other instances, they had to use carcasses that

were not slaughtered within the appropriate time window. The product they provided their customers,

9
therefore, lacked the expected shelf life. To some buyers, ALPI had the image of being unable to supply

product in the right quantities or with the right quality

that was promoted.

The expectations and goals established initially

by ALP1 appeared unrealistic. Its marketing study

showed that the consumption level of lamb in Texas

was below the national average, but the ALPI product

was expected to significantly raise that level (ALPI,

41). The business plan indicated lamb consumption

was going to grow so much in the first year of operations that ALP1 would reach full capacity within the

first 11 months of operation. Very little margin for

error or stress-testing of the projections to adverse outcomes appeared in the company’s plans. In addition,

the business plan was developed by current management and not subjected to independent review by

industry analysts outside of those very close to the

project.

As it turned out, the product did not sell itself,

and ALP1 attempted to buy its way into some markets.

ALP1 guaranteed sales to some retailers, even though

its cash-flow position was vulnerable to such an

aggressive market penetration strategy. ALP1 would

deliver product to each individual store. If it were not

sold in a particular amount of time, ALP1 personnel

would pick up the product and issue a credit to the

store. And, if the retailers encountered any quality

problems, ALP1 would replace the product free of

charge.

Since lamb represents such a small percentage of

the meat sales of a supermarket and the fact that the

sales guarantee was in place, there was little economic

incentive for the retailer to promote the product or to

price it competitively. Having a large number of

returns disrupted the firm’s ability to meet their cashflow financial obligations. Picking up unsold product

in each store also increased ALPI’s transportation and

refrigeration costs and contributed to further quality

deterioration. Cash-flow problems emerged quickly.

ALPI’s expenses had to be paid immediately; its revenue was sporadic because it had no contractual agreements with the retailers. The only real short-term

incentive for retailers to move the product was to open

valuable shelf space.

ALP1 also encountered immediate competition in

the market niche they were trying to develop. Other

packing plants adopted similar technology and were

offering their own case- ready lamb products shortly

after ALP1 started. These packers could provide a comparable product at a lower cost because they had neither the extra freight charges to receive the lambs nor

extra product shrinkage. They likely had outlets for

the non-primals also.

Operations-Retailers had varied acceptability of

the ALP1 product concept due to quality consistency

problems and limited product shelf life. ALP1 marketed fresh product, but it did not appear equally as fresh

as the store-cut product. In some instances, ALPI’s

product had discoloration problems apparently due to

the use of improper gas mixtures. In theory, the gasflush technology should extend the products’s shelf

life up to 10 days, but the product often lost its marketability in only 4 days.

ALP1 was using carcasses that had been slaughtered more than 36 hours before further processing.

Much time was lost from when the animal was slaughtered in San Angelo until it arrived at the plant in

Manor. This delay may have been adding to quality

loss problems attributed to the gas-flush technology.

Also, once in the plant, the carcasses would not

always be refrigerated properly. Because of cash-flow

problems and subsequent attempts to reduce the electricity bill, the coolers would be turned off until a new

shipment arrived. Further product deterioration

occurred during the time required for the coolers to

reach the optimum temperature.

There also was inconsistency in maintaining optimal temperatures for best finished product storage. A

spot check of the inventory discovered that some of

the lamb had been in inventory for 120 days but was

spoiled because it had not been kept properly frozen.

The cost of lost inventory approached $41,000 in this

instance-without including the cost of labor and

overhead to produce it or the cost of disposing of the

spoiled meat.

ALP1 had difficulties in the timing of shipments.

Even in the first 6 weeks of operations, ALP1 failed to

meet delivery commitments. Some brokers refused to

do business with them because they were unreliable

suppliers.

Several interview respondents attributed these

problems to the companies from which ALP1 relied on

for its supply of carcasses. The main supplier was also

a competitor, so ALP1 had to wait sometimes until

other customer orders had been filled. The perception

was that ALPI’s main supplier would neither provide

them with the specified quality nor the correct quantities. When ALP1 management approached the supplier

about the inconsistency, the supplier refused to provide additional carcasses. This problem was temporarily resolved when individuals on ALPI’s board of

directors used their personal influence to persuade the

10
major slaughter facility to continue supplying ALPI.

Although the supply source was reinstated, getting the

number of carcasses with the desired quality still was a

major problem.

ALP1 had no contractual agreement with the

major supplier because it was planning on receiving

most of the needed carcasses from other affiliated, producer-owned ventures soon after startup. As the concept of ALP1 was being developed, three lamb cooperatives were looking for their own slaughter facility to

supply ALP1 with the carcasses necessary to meet market needs.

Only one of the cooperative ventures was able to

provide ALP1 with carcasses in the specified weight

range and on credit-which helped alleviate some of

the cash-flow problems. Later on, however, this firm

had problems delivering all the carcasses ALP1 needed. So once again, ALP1 had to rely on a competitor for

its supply of carcasses. The lack of a written agreement

partially led to quality and quantity supply problems.

Although ALP1 paid a premium price for a specified quality product as its input, it did not receive a

premium price on its product output. ALP1 focused on

marketing primals that came from Yield Grade 1 and 2

carcasses. ALP1 management believed that the carcass

grading at the slaughter facility was inconsistent with

the established certification program.

ALPI, on some occasions, would receive carcasses

grade stamped as US 1 and US 2 that it contended

were actually US 3 and US 4 quality. At other times,

ALP1 would receive carcasses actually grade stamped

as US 3 and US 4 because the supplier had run out of

US 1 and US 2 graded carcasses while filling other customer orders. The supplier appeared to ignore the

need to not ship the lower-graded carcasses because of

the insignificant amount ALP1 would purchase compared with other customers. The slaughter facility handled a large number of carcasses per week, but ALPI’s

volume did not economically justify the additional

sorting cost.

Finance-The decision to purchase the fixed

assets for the processing facility (land, building, and

equipment) resulted in inadequate working capital

being available for business startup needs. Purchasing

the plant in Manor was cited as a major drain on available cash and quickly led to cash-flow problems. Some

questioned whether a lease would have been more

appropriate for the early stages of operation, but management concluded that the State-backed guaranteed

loan might not have been available without purchasing facilities.

The inability to achieve adequate financing prior

to launching the venture cost ALP1 several opportunities. One retailer mentioned that his company decided

not to establish a long-term relationship because it

knew ALP1 was having severe financial trouble. The

retailer preferred to do business with somebody that

would be there “the next day.“ These perceptions of

ALP1 as a short-term venture were widespread and

became self-fulfilling prophecies for the new business.

To take advantage of the upcoming holiday season and expecting a 20-percent increase in sales volume, ALP1 launched a promotional campaign in the

fall of 1992 offering lower product prices to retailers.

This proved to be a costly mistake. After committing to

this promotional campaign, the supply decreased and

the price of slaughter lamb rose. Figure 2 shows that

prices rose rapidly from October 1992 through March

1993. There were no price contracts in place with the

carcass supplier, so therefore ALP1 was forced to pay

much higher prices than expected for its carcasses. The

resulting cost-price squeeze exacerbated an already

cash-deficit position.

Bank overdrafts often occurred. When other

finance sources were not available, some lamb producers added to their personal investment in the firm by

covering bank overdrafts out of their personal

accounts. In the latter stages of operation, because the

slaughter facility would not load carcasses for ALP1

without payment in advance, some producers personally paid for the carcasses in order to keep ALP1 in

operation. This was indicative of the producer commitment to make the venture a success.

Accounting and Controls-All businesses need

to monitor and control their operations to make

informed decisions. This was especially true for ALP1

due to its vulnerable financial status. Management was

expected to meet this responsibility by keeping timely

and accurate financial and inventory records. An ineffective cost accounting system was used so management did not know exact costs. This impacted product

pricing decisions and did not provide timely information for cost control measures. Expenses, therefore,

were much higher than anticipated and margins were

much lower.

Inventory management and control was a serious

problem. Records of inventory changes by product

type and value were not available in a routine management information system.

Sense of Urgency

Some people expressed concern over the speed or

‘sense of urgency’ in which the operation was set up.

11
The organization itself was initiated and began operations just 10 months after the idea was seriously considered. Producer/investors were urgently looking for

some viable alternatives to the existing low lamb

prices and were supportive of management’s quick

actions, hoping the new operation would increase the

demand and improve the returns to lamb production.

Management acted quickly to purchase the facility at

Manor because the State-backed guaranteed loan commitment and the purchase option on the processing

plant were approaching the expiration date.

Operations began without having all the necessary capital in place. Although verbal commitments

were received, the sheep industry could not support

this producer-owned venture with the large amount of

equity capital it needed. Constituents from Texas and

Utah were the largest investors while equity capital

from California, Wyoming, and Idaho was less than

initially projected.

Conclusion

Lamb producers were hurting economically, and

that was a key reason for the venture in the first place.

The producer/investors were experiencing low prices

for their lambs and felt much of their price problems

were due to the market structure of the industry. The

producers involved in ALP1 believed if they integrated

into the value-added processing sector, they could not

only capture some of the retail-to-farm level price

spread, but also could force a mature industry to

become more innovative in the way it merchandised

lamb.

The ‘sense of urgency’ to do something to support the industry may have discouraged critical evaluation of the proposed operational plan. Had the contingency planning and effective evaluation been

conducted more as a proactive strategic process rather

than as a reactive response to the existing economic

environment, some of the perceived problems with

financing, operations, marketing, and management

expertise would have been better addressed. The venture still might not have been successful, but the economic losses could have been less severe.

Virginia Lamb Cooperative

Brief Overview

Virginia Lamb Cooperative (VLC) liquidated its

assets in May 1993-about 15 months after beginning

operations. VLC was a producer-owned cooperative

with the primary goal of developing a niche market for

high-quality lamb in Washington, UC, and surrounding consumer-market areas (figure 4). The Certified

Fresh American Lamb (CFAL) grading criteria were

used to evaluate member lamb deliveries.

Representatives of the Virginia Department of

Agriculture and Consumer Affairs provided grading

services.

VLC was initiated on a relatively small scale. Its

business and marketing approach was similar to a

Vermont lamb marketing cooperative. A lo-county

area in Northern Virginia was the main geographic

production region for the cooperative. This was not the

primary production region in the State. Most members

had fewer than 100 ewes. Even if the venture had

reached its planned volume, only about 5,000 lambs

would have been marketed per year (about 100 lambs

per week).

Even though the venture failed, the producers

felt they learned how to better manage their flocks to

meet the higher quality standards of CFAL. When the

venture failed, many of the lambs delivered to the

cooperative were meeting CFAL grade specifications.

Eventually, the producers recognized the need to find

a market for some of the lower-value lamb cuts. The

cooperative developed a niche-market sausage product that appeared to be accepted by consumers.

Initial financing for the cooperative was limited.

Equity capital was collected from members at $200

each. A local businessman loaned the cooperative

funds to purchase a delivery truck. Although some of

the members ultimately donated a lot of their time and

out-of-pocket expenses, actual business losses were

limited to essentially the initial equity capital obtained

from memberships.

The case study analysis suggests reasons for the

cooperative’s failure-financing, lack of consistent volume of lambs necessary to penetrate retail markets,

inadequate plan to handle less- desired carcass parts,

and limited understanding of problems related to competing in the lamb marketing arena. These causes must

be adequately addressed if future ventures of this type

are to succeed.

Individuals interviewed for the VLC case study

included producer-members (four of whom were

members of the board of directors), a former manager,

and other individuals that knew of how VLC was created and how it operated, even though they were not

specifically involved in its management. This latter

group included individuals with the Virginia

Department of Agriculture and Consumer Affairs and

Virginia Polytechnical and State University (Virginia

Tech), the State’s land-grant university.

12
Figure a- The Primary Virginia Lamb Marketing Area

l Charlottesville

D.C.

VLC: The Pre-formation Organizational Process

The initiative leading to formation of VLC was

conceived in the fall of 1990 at local sheep producer

meetings in Virginia. A representative of a Vermont

lamb marketing cooperative, which appeared successful at that time, made a presentation to the Virginia

Sheep Federation board in October. About a month

later, producers from the Northern Virginia area

attended the Piedmont Sheep Producers Association

meeting. The main topic of concern was the apparent

large farm-to-retail price spread for high-value lamb

cuts and what could be done about it. It was decided

to explore the possibility of initiating a marketing

organization with the goal of enhancing the marketing

of lamb and increasing producer profits.

At that time, most producers in the lo-county

Northern Virginia area were either marketing their

lambs through local auction markets or through custom slaughtering and direct-marketing activities.

Generally, the lamb producers in this area are smaller,

with the lamb business contributing a relatively smaller amount to total family income. Of course, that does

not mean that the producers were any less interested

in achieving a positive cash return for their enterprise.

Although the headquarters of the Eastern Lamb

Producers, a teleauction cooperative, was located in

Southwestern Virginia, the producers involved in VLC

did not consider that a viable marketing alternative

due to the small volume of lambs they would have

ready for market at any one time.

Many of the producers wanted to emulate the

Vermont lamb marketing cooperative so there was little evaluation of alternative types of business structures. The producers were from a relatively small geographic area and many knew each other from other

sheep producer meetings. This fostered a level of trust

and feeling of commonality among the primary leaders of the venture. Advisors from USDA’s Rural

Business-Cooperative Service (RBS) were asked to

assist the producers in looking at the marketing cooperative organization structure. The proximity of the

venture to Washington, DC, provided easy access to

cooperative expertise from USDA in the feasibility

analysis process. Faculty from Virginia Tech also were

involved in the early formation stages, along with representatives from the Virginia Department of

Agriculture and Consumer Affairs.

VLC: Pm-formation Feasibility Analysis

VLC was studied in 1991 as a possible marketing

venture to improve the lamb enterprise for Northern

Virginia producers. A producer committee was formed

and surveys were planned to determine producer

interest and potential volume for the cooperative. With

the help of a specialist from USDA’s RBS, a detailed

financial feasibility analysis was developed

(Schwartz). In retrospect, the business plan was too

optimistic when the marketing factors were considered. Nevertheless, the cooperative used the feasibility

analysis to guide early decisions by the steering committee and the board of directors, once the cooperative

was officially established in late 1991.

In particular, it was decided to contract for lamb

slaughter and processing from existing facilities rather

than have the cooperative purchase and operate a

slaughter plant. This would have required significantly more investment from the producers. Also, the first

manager was hired on a part-time basis as proposed in

the financial feasibility analysis.

13
Although principals in the VLC venture reviewed

and challenged some of the projections included in the

financial feasibility study, the issues of adequate supplies of appropriate quality, what to do with lowervalue cuts that did not have a ready market, and the

needed startup capital still were overlooked. When

asked why more time and scrutiny was not given to

the marketing plan of the new venture, producers said

they thought a national lamb organization had committed marketing assistance to the cooperative once

operations began, but the assistance never materialized.

The membership appeared to have some nonmonetary objectives for supporting the cooperative

marketing venture, so it was easy to rationalize away

some of the feasibility study assumptions. Given the

scale of operation for most of the members, even if the

cooperative had been successful and fully met startup

projections in the anticipated timeframe, the realized

patronage refunds to the average member likely

would have been less than $1,000 per year, compared

with the traditional auction market alternative.

Although it was never brought up in interview discussions, an incentive for maintaining an agricultural

enterprise in this region was the apparent property tax

valuation benefits compared with the cost of non-agricultural related property taxes.

Another factor contributing to the ultimate

launching of this venture was the apparent encouragement the producers were getting from governmental

agencies and producer organizations. Late in the preformation feasibility analysis stage, State department

of agriculture personnel, analysts with a USDA agency,

and regional officers of a national lamb association

appeared to be supportive of the VLC concept.

Caution flags raised by individuals not associated with

one of those groups were apparently rationalized

away.

In retrospect, a tradeoff seems to exist between

the entrepreneurial zeal that is required to carry a new

venture forward and the realistic consideration and

evaluation of views that question the concept or

approach. Groups or agencies that serve as advisors to

producer-owned marketing ventures need to carefully

provide producers with more information on the

potential outcomes and risks associated with launching a new business-both positive and negative-to

encourage a more balanced evaluation.

Producer Commitment

The initial investment required of cooperative

members was quite low ($2001, yet a number of targeted producer members never made the payment.

Instead, they took a “wait and see” attitude. A core

group of the cooperative leadership, however, was

very committed to the concept and the organization.

This commitment was exhibited by the “sweat equity”

they invested. They volunteered their time and out-ofpocket expenses to merchandise the lamb sausage

products at area fairs and festivals to reduce product

inventory and reduce cooperative losses. These members, however, just did not control enough supply to

maintain a consistent volume of lambs to be marketed

throughout the year.

Early in the operation, due to the “Virginia

Finest” promotion campaign with the State department of agriculture and the CFAL quality standards,

some cooperative members’ lambs were rejected by the

grader as unacceptable to meet the higher quality standards. This, however, did not appear to cause membership problems, which might have been expected

with less commitment to the concept.

Positive Results

Even though VLC went out of business in less

than a year and a half, lamb producers involved in the

venture were able to point to some positive results of

the effort. Producers interviewed for the case study

appeared to believe that a successful outcome was the

educational value of learning how their flocks and

management practices could be improved to meet the

higher quality standards of the CFAL. At the conclusion of the venture, a very high percentage of the

lambs delivered to the cooperative were meeting the

CFAL specifications. They now understand that niche

retail and restaurant markets will require a premium

product of consistent quality. The producers also mentioned the VLC experience gave them a better knowledge of the complex marketing system for lamb-from

producer to consumer.

Not all parts of the lamb carcass enjoy the same

demand as the loins, racks, and legs. Given the necessity to market the lower-value lamb cuts at a price as

high as possible, the cooperative developed a

processed lamb sausage product that appeared to be

accepted by consumers. It took so long, however, to

obtain Government labeling approval so the product

could be marketed in retail outlets, the cooperative

already was in the process of closing. Nevertheless, the

respondents believe the sausage product could be successfully distributed in some niche markets.

Several ideas were explored for networking

opportunities and alliances that would facilitate the

penetration and distribution into niche markets for

14
both the high-valued cuts as well as the processed

products. Several examples could be used by future

lamb marketing ventures. A specific idea mentioned

was the teaming up with the wine marketing association to jointly promote wine and lamb at specific

events, with the assumption that the target market segment would view them as complementary products.

Internal Environment

Many factors likely led to the eventual closing of

VLC. The factors mentioned by the individuals interviewed can be categorized into these main areas: 1)

inadequate financing; 2) limited management expertise

and time in some key areas; 3) misguided marketing

efforts and plans; 4) lack of a consistent supply of quality lambs; and 5) the business failure of the low-cost

slaughter facility and processor.

Finance- Startup financing for VLC was inadequate to accomplish the goals of the organization. The

initial member equity capital contribution of $200 each

was not enough to sustain a viable operation, even if

more lamb producers had joined early in the cooperative’s existence. One local businessperson loaned the

cooperative money to purchase the vehicle to transport

the lambs to and from the slaughter facility. No other

outside capital was available, although attempts were

made to obtain some funding through the Small

Business Administration. There were only enough

funds available to hire a manager half-time; however,

that was the approach used in the financial feasibility

plan from the outset. This required cooperative members to volunteer their time to assist with key management and marketing activities.

Management-The feasibility plan included a

salary for a half-time manager at the rate of $12,000

per year, but the expectations of what could be accomplished for the amount of effort that implies was likely

too optimistic. The initial manager had experience in

cooperatives and in producing lambs but had to develop expertise in the lamb marketing and processing

areas. The time that it would take to begin developing

expertise in the other areas appeared to be frustrating

both to the cooperative members and the new manager. It was soon mutually agreed that the first manager

would step down so the cooperative could hire a manager with some experience in developing markets for

agricultural products. However, the salary that could

be paid did not give much incentive to aggressively

pursue a marketing program, and friction developed

between the management and the board of directors.

At the time the cooperative was dissolved, the chairman of the board also was functioning as the manager.

Marketing and Distribution-Along with inadequate financing, marketing appeared to be a particular

weakness for this cooperative. First, there was the

inability to develop a volume market outside the production area. Some of this may have been a result of an

inconsistent supply, but there appeared to be a poor

understanding of what market outlets demanded and

what it took to develop a market and to compete with

established entities. The cooperative soon had to limit

its vision and focus on local, labor- intensive, niche

markets and a few retail stores in Harrisonburg and

Richmond. Producer volunteers supplied most of the

labor to reach the niche markets. The effort the cooperative members put into finding upscale markets in the

Washington, DC, area never proved successful.

Second, the inability to find viable markets for

the less-desirable carcass parts plagued the cooperative. It had to rent additional freezer space elsewhere

to handle the growing inventory of off-cuts. This

became more of a problem when the Pennsylvania

slaughter facility ceased its operations. Up until then,

the Pennsylvania company was buying some of the

lamb shoulders from the cooperative during certain

periods to meet its commitments to specialty markets.

To the cooperative’s credit, when members recognized

the problem of mounting inventories of less marketable portions of the lamb carcass, efforts were made

to find economically viable alternatives to merchandise these off-cuts. However, it was too little and too

late. Even though an acceptable recipe apparently was

developed for lamb sausage, inadequate financing was

available to effectively market this product in sufficient volume to match the complementary volume of

loins, ribs, and legs. Government approval for the

product labeling was received, but only after the cooperative was about to fold.

Product Supply Issues-The cooperative was

probably too small to become a reliable supplier of

quality lambs to retail markets-an important part of

their marketing plan. For retailers to devote valuable

shelf space to products, they want assurance that, the

right amount of the product of the right quality will be

delivered to their stores each week. VLC’s producers

lacked sufficient weekly volume of lambs to likely

meet the needs of major retail outlets.

The cooperative venture focused on a small geographic production area of one State. Some of those

interviewed indicated that attempts should have been

made to include at least the entire Commonwealth of

Virginia in determining interest in the concept of VLC.

This might have increased the available supply of

15
quality lambs to the cooperative, but the area expansion also may have opened up other issues the cooperative leadership preferred not to address.

Loss of Key Processing Facility-Although

transportation costs were higher, the cooperative used

a slaughter facility in Pennsylvania because it was

large enough to maintain a carcass grader on site to

handle VLC’s extra supply. This made the overall processing cost, including transportation, lower than

using a local slaughter facility. When the Pennsylvania

facility shut down in November of 1992, VLC had to

use other slaughter facilities and absorb the extra carcass grading costs. Marketing and distribution costs

jumped sharply, making VLC lamb less competitive in

price.

As mentioned earlier, the Pennsylvania firm not

only was providing the slaughtering function, but it

was serving as a periodic market outlet for some of the

shoulders. When this opportunity was lost in conjunction with moving to a local processor, the inventory of

less desirable cuts began to mount in the cooperative’s

freezers. VLC already was incurring numerous problems in maintaining a viable business, but this factor

appeared significant.

Conclusions

Lamb producers and their advisors did a lot of

things right in studying and preparing for the launching of VLC, but in hindsight some would argue that

the focus was not on the right things to establish a successful lamb marketing cooperative. The producers

appeared to take their time in evaluating the concept

and preparing a financial feasibility study prior to

launching the venture. Portions of the plan were followed closely, which helped keep the investment in

fixed assets to a minimum. This helped limit the losses.

Members lost their original $200 equity contribution

for membership, but the cooperative had less than

$2,000 in accounts payable when it closed in May of

1993.

Contributing to the failure, however, were incorrect assumptions about available quality and supply of

lambs from producers and the ease of reaching the

projected volume necessary for the cooperative to

reach its financial objectives. The issue of the less

desirable cuts was not adequately addressed in a marketing plan. Also, the financial plan provided neither

slack for missed startup targets nor funds to support

extra efforts in the marketing management area.

Prospects for future producer-owned lamb marketing ventures among the principals in VLC appear

very limited. This reluctance likely resulted from significant time spent by a few cooperative members (primarily directors) without benefiting from that opportunity cost. Their sense of pride in making the concept

work went far beyond what they could have expected

in a financial reward. But, since the profitability of the

lamb enterprise does not make a major impact on most

of the part-time producer’s livelihood, it is not likely

that future efforts requiring such a time commitment

by these members will be easily attempted.

Comparisons and Contrasts

Although producer-owners in ALP1 and VLC

differed substantially in terms of size, scope, and

dependence on the lamb industry for their economic

livelihood, there were some common characteristics:

l Both ventures evolved when farm-level lamb

prices were depressed so producers may have felt an

urgency to begin the ventures and placed unrealistic

constraints on the strategic planning process so critical

to successful ventures.

l Both ventures tended to be buoyed by perceived positive signals from respected institutions.

ALP1 investors received financial support from AS1

and State-backed lending programs designed to support value-added ventures. VLC believed that the

strong support, interest, and time spent by USDA, the

State department of agriculture, and by representative

of a national commodity marketing organization indicated the venture could succeed.

l Participants in both ventures believed that the

existing marketing structure for lambs could be

changed if the producers would just make the commitment. Producers in both ventures believed that if lamb

products were presented in a more positive package

they would meet immediate consumer acceptance.

Both found out the hard way that market development, penetration, and distribution is a very complex

process that requires considerable planning, capital,

commitment, expertise, and perseverance.

l Both ventures had positive outcomes although

the businesses ultimately failed. Both groups learned

important lessons about the complexity associated

with marketing their products. Both gained from technology and product development.

The only significant difference other than the

size, scope, and dependency on lamb production as an

economic influence on their livelihood appeared in

their willingness to try again to accomplish a producer-owned lamb processing venture. ALPI respondents

almost unanimously said they would try to learn from

16
ALPI’s shortcomings, and appeared undeterred in

their vision to establish more producer influence in

marketing their products. VLC participants, however,

were just the opposite. They were almost equally

unanimous in not wanting to get involved in such a

future venture. The major drawback for Virginia was

more in human capital costs than financial cost or need

for the cooperative.

Regardless of the size or background, the authors

were impressed with the capital, both human and

monetary, that producer-investors were willing to

commit. The failure rate of startup value-added ventures in a commodity-oriented marketplace is high.

Nevertheless, it is not easy to discuss candidly why

something that you so strongly believed in failed. The

fact that all respondents freely discussed the issues so

others might learn from these examples is a tribute to

the integrity of those involved.

References

“American Lamb Producers Inc. (ALPI) - Business

Plan.” Englewood, CO; October, 1991.

“Assessment of Marketing Strategies to Enhance

Returns to Lamb Producers.” TAMRC Lamb Study

Team, Texas Agricultural Market Research Center,

Texas A&M University, December 1991.

“Cattle and Sheep Outlook.” National Agricultural

Statistics Service, USDA.

Davis, Ernest E. “Structural Changes Evident in Lamb

Packing.” Western Livestock Round-up. Livestock

Market Information Center: Denver, CO, March

1991.

Harstin, Daniel D., and Frank 0. Leuthold. “The

Development and Operation of the Walden Ridge

Producers Cooperative: A Case Study.” University

of Tennessee: Knoxville, TN, July 1994.

Ingalsbe, Gene and James L. Goff. “How to Start a

Cooperative.” Agricultural Cooperative Service,

USDA, April 1986.

Kirpatrick, Tamra and James B. Bell. “Niche Marketing

Opportunities through Lamb Cooperatives.”

Virginia Polytechnic Institute and State University

(Virginia Tech): Blacksburg, VA, September 1992.

Leenders, Michiel R. and James A. Erskine. “Case

Research: The Case Writing Process.” 3rd ed.

School of Business Administration. The University

of Western Ontario: London, Canada, 1989.

Purcell, Wayne D. “Analysis of Demand for Beef, Pork,

Lamb, and Broilers: Implications for the Future.”

Research Bulletin l-89. Research Institute on

Livestock Pricing, Virginia Tech, Blacksburg, VA,

July 1989.

Purcell, Wayne D. “Consumer Survey: Lamb Buying

Behavior and Related Merchandising Aids.”

Research Bulletin 2-93. Research Institute on

Livestock Pricing, Virginia Tech, Blacksburg, VA,

April, 1993.

17
Schwartz, Mama R. “Virginia Lamb Cooperative:

Financial Projections and Feasibility.” Technical.

Assistance Report, Agricultural Cooperative

Service, USDA, Washington, D.C., January, 1992.

“The Seven Most Common Causes of Business

Failure.” Haass & Co., Summer, 1992.

“U.S. Sheep Industry - Market Situation Report.”

American Sheep Industry Association:Englewood,

CO, May 1995.

Yin, Robert K. “Applications of Case Study Research.”

Vol. 34. Sage Publications: Newbury Park,

California, 1993.

18
U.S. Department of Agriculture

Rural Businese-Cooperative Service

Stop 3250

Washington, D.C. 20260-3260

Rural Business-Cooperative Service (RBS) provides research,

management, and educational assistance to cooperatives to

strengthen the economic position of farmers and other rural

residents. It works directly with cooperative leaders and

Federal and State agencies to improve organization,

leadership, and operation of cooperatives and to give guidance

to further development.

The cooperative segment of RBS (1) helps farmers and other

rural residents develop cooperatives to obtain supplies and

services at lower cost and to get better prices for products they

sell; (2) advises rural residents on developing existing

resources through cooperative action to enhance rural living;

(3) helps cooperatives improve services and operating

efficiency; (4) informs members, directors, employees, and the

public on how cooperatives work and benefit their members

and their communities; and (6) encourages international

cooperative programs. RBS also publishes research and

educational materials and issues Rural Cooperatives magazine.

The U.S. Department of Agriculture (USDA) prohibits

discrimination in all its programs and activities on the basis of

race, color, national origin, gender, religion, age, disability,

political beliefs, sexual orientation, and marital or family

status. (Not all prohibited bases apply to all programs.)

Persons with disabilities who require alternative means for

communication of program information (braille, large print,

audiotape, etc.) should contact USDA’s TARGET Center at

(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director,

Office of Civil Rights, Room 326-W, Whitten Building, 14th and

Independence Avenue, SW, Washington, D.C. 20260-9410 or

call (202) 720-6964 (voice or TDD). USDA is an equal

opportunity provider and employer.