Scale & Profitability

[asapilot]

Hey all-

I'm interested in a discussion of the necessary scale of a coral farming project to maintain profitability. First, I'll tell you a little about my plan...

For the short-term, I don't have access to space for a greenhouse. This may change by year's end. I do however four spare tanks and many different pieces of equipment(lights, pumps, etc.), so I have enough to get off to a small start. What I'd like to do is gather together a collection of about 40 different SPS species/variants and begin propagating. Being located in L.A., it's easy to cherry-pick or "scab" as was described in another thread. I'd like to be part of the solution rather than the problem though, so I'd like to push the propagation of the original colonies rather than just keep pulling stuff out of the ocean. Obviously that will affect production. I have a good relationship with a LFS and one internet retailer presently. I'm also e-savvy and I can set up my own site and storefront with minimal cost. So, my question is, is it realistic to operate on this small of a scale and expect to come out on top?

My concern is simply that supply won't keep up with demand or that this simply won't be enough volume to cover costs. Doing the simple math, I just don't think that will add up to a productive farm project. I figure after a couple of months, I'll be out of frags and waiting for new growth. At that point I'd have to go back and buy new colonies and then I'd just be another frag "scab".

I'm curious about the experiences of those who've run small-scale operations like this and how they managed their stock long-term. As I said, my intention is to take this to a larger scale in the future, but I'd like to work out some of the kinks on a small scale before I go make BIG mistakes.

I'm pretty comfortable with the mechanical part of the operation as I've set up and run individual prop tanks before, so I'm mostly looking for business insight though I'll take any advice for sure! I'm enjoying reading all the threads and gathering everyone's experience. A lot has been said about how "cutthroat" this business is, but I've found that if you show a little interest and you do your homework, people are pretty willing to share. Thanks in advance for those who've been through this already.

[loves saltwater]

tagging along

[asapilot]

Maybe I was wrong when I said people are usually "...willing to share."

I'm mostly interested in hearing where about where the line is between "hobby" and "business". I've done the xenia trade-in and the frag swap and those types of things, but I'm wanting to take it to the next level. Without just being a cherry-picking 'frag-&-bag'-er, I have a hard time envisioning profitability on anything but a very large scale. When I get some more time, I'll put my numbers up here and hopefully that will get some feedback going.

[123and456]

i agree with your thinking the demand seems to be to great for anything other then a very large system or running the chop shop. I frag off my tanks about once a month (150 gallons) and Its all gone very quickly. As for being able to keep enough live stock around I think I personally would have to have more then 10 times the space that I have now atleast. I also dont have a website either so I can't imagine how much demand that could create.
I often wonder if a single green house could produce enough frags to keep up with good advertising. Seems to me that everything grows so slow you would have to have some wild cought things for sale and then charge a premium for the aquacultured frags. Thats my .02

[123and456]

I got to thinking about this thread some more and here are some thoughts that I came up with. If using a 1"x1" tile to put frags on a area of 48"x12" can hold approximately 576 frags. That was easy to figure but whats a little harder is how much room will the colonies to provide the frags take up? This is going to depend on your turnover rate and growth rate both.
If we base the turn over rate off of 25 frags sold a week your turnover rate is 23 weeks. Say your just doing zoas and selling frags with 15 polyps each thats 8640 polyps. That amount of frags (polyps) grown out in not even half a year would take a decent size GH to keep enough colonies to not be chop shopping from the wild.

[Scalestfw]

Here some thoughts and perspective from an lfs owner (and RC lurker):

1. Find your market! Figure out who you are going to sell your stock to, whether its fellow hobbyists you know, online retail, aquarium shops or wholesalers. If you are selling to a store or wholesaler, ask them what they sell most and see if you can compete with their supply prices.

2. Eliminate degrees of separation from your final customer (but not from Kevin Bacon). If you sell directly to a reefer, there is no separation; to a fish store, one degree; to a wholesaler, two degrees, etc. If the final selling price is $30 for your coral frag, you will get the whole $30 selling directly, $10-15 selling to stores and $5 for selling to wholesalers. Of course the flip side is that you have to find all of your market yourself with no separation whereas a store or wholesaler can much more quickly distribute your product. This becomes critical if you are focusing on a limited number of species for maximum production.

3. Focus on fast-growing species. Right now the primary function of price on corals is size. Why? Because large corals cost more to ship from their collection points than small ones do. You can sell leathers, colts, branching euphyllias, mushrooms, etc. 'til the cows come home through a retail store. It's why we have so many on display.

4. Focus on species that are not reliably available from collection points in the wild. If a store orders encrusting montipora (for a well-known example), it probably does not control what color(s) the specimens will bring. On the other hand, captive-propagated monti will likely be selected for its amazing combinations of colors and will hold those colors and sales value with reasonable care.

5. Balance 3. and 4.! This is the hard part and can only be answered by your experience in your specific market and your system's strengths and weaknesses on growing various species.

6. Don't forget your personal favorites. Keep at least some of the corals that keep you keeping corals so you don't get bored by doing it, even if they don't sell on the same scale as some of the more common species.

7. Reserve a small space for trying new things or corals that aren't readily propagated right now. You may stumble on something new! Nobody got good at keeping or propagating a tricky species without trying and failing a few times.

8. Collaborate with other people propagating corals so that you don't all end up growing the same species! You are not going to flood the market with yellow sarcos. But you and ten of your best friends may very well.

I could go on and on here but would end with the point that even if your system is not generating wild profits in the first year or two (what business does?), the prices on propagated corals are and will continue to climb steeply as either scarcity or regulation cuts supply of wild-collected specimens. This is by no means a qualitative statement as to either of those two issues, merely a recognition of an imminent and current shift in the business climate. Get good at it now, establish your market and you'll be in really, really good shape when the revolution comes.

[asapilot]

Thanks guys, good information. Here's my thoughts...

123and456, thanks for working those numbers. That's a pretty good number of frags in a tank that size. I figure if you give them some space for better flow and less competition, you could do around 300. I've got three spare tanks laying around that are that size or larger. If I used two for frags and one for parents, I could put together a large number of frags. I figure at an average of $30/frag(if I sell direct), I'd need to move at least 100+ frags a month. So, it's possible to hold and move the necessary number of frags. But, like you said, the real difficulty is having enough parent stock to keep up with growth rate vs. frag needs. I figure I'd need multiple parents of the same species to keep from having to frag them down to nothing all the time. That would require at least the same amount of space as the frag tanks. This may take some experimentation to find what kind of supply one can reasonably expect to sustain.

Saclestfw, I really appreciate your insight as an owner.

1) I think I'd initially start as an online/walk-in retailer. On a small scale, I don't think I'd have the supply to support working with a wholesaler or store only. The LFS here that I have a good relationship has just started pushing frags, so I could probably supply them with some as well since it's relatively small. Right now, they're just doing ORA, so I could offer another alternative.

2) Eliminating the separation is why I would like to sell direct. I feel like, especially here in the LA area, I have access to a pretty good market if I can just make the connection. I'm hoping my web skills might will help with spreading the word. As I said, the folks at the LFS have been pretty helpful in keeping me in the loop in terms of what they do and who they know. As for Kevin Bacon...I haven't figured out my own six degrees yet.

3) Growth rate is my main concern. Outside of m. digitata and the like, I think SPS will require huge volumes to keep stock a reasonable level. I suppose I could supplement this with mushrooms, xenia, etc. to cover the leaner times.

4) Unusual/rare species are one area where I think I might be able to gain a foothold. It's been my experience so far that the quality of what I've seen here in LA is higher than what I was used to when I was working at an LFS in Texas, even with the same supplier. The ability to visit the wholesalers directly has been an advantage for some stores who've built good relationships I think. As for direct imports, the relationship is even more important. I've managed to get my hands on a few interesting pieces thus far which have done well in maintaining their quality.

6) Good point. I don't want to get caught up on just pushing stuff out the door. Also, I think your own interest and passion about something trickles down to the customer.

I think that when we read about all the efforts to make this happen here on RC, it seems like everyone is doing it and perhaps people get discouraged because they believe the competition is overwhelming. In reality, the number of people successfully propagating and selling corals is tiny in comparison to the import trade. As you've said, prices continue to climb and demand continues to increase for items that have shown hardiness and quality. I think you're right that we're in an important phase where captive propagation is going to shift from a hobby to a necessity. I'm hoping to be in a good place when that time comes.

[gtrestoration]

Without really addressing an individual post I'll just say it's difficult to compete with overseas operations that are using the ocean for growout and cheap labor for propagating tasks. Even with air-shipping costs they can compete very well.

To make it profitable the product MUST sell for more than what's currently on the market for the most part. The higher end retailers have found a niche market where customers are willing to pay premium prices for some non-premium stuff.

I don't really see that scale plays a major role in the propagation end unless it helps find a market for the product. In my indoor propagation light is the major expense. Adding more tank space always means adding more light and the cost involved in it's operation.

I think those that do well will be those with average coral knowledge, good business sense and better than average selling skills.

SteveU

[biowerks]

I currently am starting to grow rare and exotic zoas and lps, blastos, rare morphs of calustrea, lords, dendro, and other expensive things I beleive that in my area va beach the demand is high but the supply is more directed to common stuff that sells at a low price quickly and I can have some fun supplying people and stores in the area with things that they cant get normally.

[sharkdude]

don't quit your day job just yet!

http://www.garretts-acropolis.com/
Steve is a member of www.scmas.org and has been in 'business' for several years now. He is very personable and willing to share info.

[biowerks]

well, I am an account manager full time for HSBC bank and I work 2 days a week at a pet store, while not doing either one of those I own an aquarium maintenance biz with 56 customers that are on a 2 week schedule and 28 that are on a 3 week schedule. I would really be doing it for the love of the hobby and as a way to make sure that all of my customers tanks are the best around! but I will not be quitting my day jobs.

[raaden]

First let me apologize this is really long, but I hope it is helpful

asapilot, I like they way you are thinking. You have no idea how many people have pm'd me with their ideas for making a profitable setup and have not even considered the idea of prodution or what to do when they demolish their broodstock because of not understanding the growout rates. If you need some more help pm me I'll be glad to share what I know.

The basic answer is that you should figure out what "come out on top" means to you and then you can decide whether your goals are achievable or not. To one person making $200 a month is great to another making $500 a month just won't cut it. It doesn't just have to be about money either, in your case you might be happy just to make a small profit and develop the skills right now that you can use later to expand and move onto a larger scale. You have to know your expectations before you can decide if you should make a go of it or not.

Once you have an idea of what you want to get back you can use these basic formulas to see what it would take to get the money return you are looking for.

Basic Formulae for Profitability in production

(Sale Price per piece - Cost of Goods per piece) x Production Level(in pcs. per sales timeframe) - Fixed costs (per sales timeframe) = Gross Profit (per sales timeframe) The main issue with this formula when applied to this type of production is the figuring of your fixed costs.

Production Level = Holding Capacity / Growout Timeframe The issue here is that growout timeframe is not going to be completely consistent and has alot to do with Production Leveling and production schedules. This can be tricky but there are formulas for this as well but they are a bit BTS.

Basically you can go at it from a bunch of different angles based on what you part of the equations you are looking for but this will allow you to see if you can even make a setup work or if you will need to tweak it to get the results you are looking for. This is how I started when I was working on my business plan and then once you start tweaking you will get a feel for what is a comfortable balance between production and sales. Once you get a good understanding you can then start to layout a whole production cycle and extrapolate that out to many different size operations.

What I found was that for me a hobby type setup (where I was making enough money to justify the work, but not enough to live on) using artificial light was around 45 sq ft. of grow space with mostly softies and a bit of acro. When I wanted to see what it would take to make this a full time operation the numbers jumped quite a bit and there wasn't really a middle ground. It also surprised me that I couldn't grow the business very well like I expected. The work grows much faster than the profits and fixed costs grow much faster than production does. I found that I really needed about 650 sq ft. of grow space under natural light to even consider profitability (and this is with a 14 month growout with no sales). Once the initial growout is done the greenhouse should be pretty self sufficient production wise and depending on how sales project should gross in the $200k range with a net somewhere near $80-120k. That is not taking into account Owners Sweat Equity and the number of hours that need to be invested in a setup like this is not to be underestimated. This also does not even make a dent in the demand for livestock that could be achieved, but with many others doing the same thing demand can be sated.

As far as where to unload your stock you have the right idea about selling to the stores you know. That is a great idea and will help you get some money as you decide to grow your setup or not. Most wholesalers will not even talk to you until you prove to them you can provide massive amounts (>100 pcs per order) of quality stock and produce this consistently. The best way to do this would be to get some letters from the stores you begin selling to.

One word of caution on unusual rare species. The only decent markup for those is at retail. You as a supplier will not (from what I have seen) see a significant increase in your sales price just because it looks pretty. To get this sort of premium you will have to sell to the customer. The retailers I have talked to will not give more than a 20% premium from standard pricing for a "pretty piece" because customers are so fickle, what is hot today could sit in their tank for months next week. This is also why all of the specialty stores have popped up so much.

A couple of comments on the other posts...

ScalesFTW: well nothing to say here he said it all and said it very well.

I was a little confused by what 123and456 posted so I took his premise and worked it using the same formulas I used for my business plan. The most confusing part was that he used production and demand to determine growout and then used the derived growout to then forecast total production. I couldn't figure out how that could possibly work. But if you follow his numbers you would certainly need quite a bit more space that I have in my Greenhouse to make it work and that is just for a single line item. I will work this up and post back what I get.

gtrestoration: I sort of agree with the premise you are using, but not on the fact that it must sell at a premium. If you sell directly to the retailer as the OP indicates you can save the LFS owner much more than just shipping charges and make a decent amount of money yourself. When I was looking at all the stops a piece of coral makes before it gets to the LFS tank I found that it would be marked up anywhere from 8-14 times and at 40%-120% depending on who it goes through. That same piece that we are told is collected for a quarter once marked up by everyone that touches it is now $15-25 for the LFS Owner. Not only are you saving them shipping but also saving them everyone elses markup, and hopefully you can pocket a portion of those markups.

**Quote **I don't really see that scale plays a major role in the propagation end unless it helps find a market for the product. In my indoor propagation light is the major expense. Adding more tank space always means adding more light and the cost involved in it's operation.

In a greenhouse it is quite the opposite. Heating is by far the largest expense and that gets smaller in comparison as you expand. The more water you have the more residual heat you will have. The more space you have in the GH the less temp fluctuation you will have. So in theory you will hit a point where heat becomes less of a % expense and labor becomes the greater expense because you will no longer be able to handle it all yourself.

I do however agree that business sense is far more important than coral skills. I knew a veggie farmer growing up that said that farming is so easy that anyone can do it with minor training, it is the business side that will mean the difference between keeping up and starving.

biowerks... I just moved from Kempsville to Raleigh to start my greenhouse operation. How is the town holding up??

[biowerks]

great, how long ago did you leave? well everything is fine pet paradise still have cyano all over everything the reef chief is finally opening the store that he has been talking about for a year and all pet (where I work for the discount) is finally starting to look alot better. those are all the stores that will buy from me when I get my stock ready. (all pet has 2 stores) and Atlantis aquarium might buy some stuff if its really rare.

[asapilot]

raaden-

Thanks for taking the time to post. I'm reviewing the information now. I actually had planned to PM you as I'd been reading through your thread and also reading your business plan. I really appreciate the time you've taken to share your experiences.

[Scalestfw]

The one common thing that I see that is troubling from the LFS owners' point of view is that the corals that are being propagated by hobbyists are not usually the ones that sell most in volume, even though the best sellers may grow faster in a propagation system.

In other words, if you concentrate on soft corals and LPS, at least the fast growing ones, you'll do better than by working with SPS. I can sell ten times the zoas, leathers, euphyllias, mushrooms, Xenia, colts, and brain corals than I can acros, montis, pocillios, etc. Softies and LPS are generally easier to grow, more tolerant of varying conditions and have a much, much larger market than SPS.

[toddlaco]

Scalestfw, Exactly what I have been thinking while reading this post, other similar posts and talking with other prospective farmers.

It seems that everyone wants to start an SPS farm showing a lack of research with regards to demand. Plus the fact that most SPS hobbiests want everything for free (just read the for sale forums for evidence of this). The SPS may sell decent directly via the internet, but I don't see a good market for it with LFS or Wholesale.

I personally am in the early growout phase of my coral farm (about 12 months to go and counting). My plan, much like Raaden's consists mainly of RBTA, GBTA, Xenia and multiple soft corals, etc.

The beginners are what really make this industry the most money.

[raaden]

Another thing that I forgot to put in my post above is that if you are looking to supply the local market, then look most into the few species that do not ship well. I know where I used to live many stores hated ordering xenia, anthelia, and the like because they would inevitably lose quite a few to shipping.

** One more thing that I think most people miss when planning something like this is that, like any business, what you are going to sell is only half of the business idea. You have to find a way to differentiate yourself. Always ask yourself why would a LFS owner break his longstanding relationship with a supplier that he must like working with to give you a chance. If you can come up with a good, proven answer to this then the dollars and cents will follow that lead. I spent many months coming up with my 'angle', and it is really the only part of the plan that I feel very confident about.