120415_Africa-Money-4-280x160Export diversification involves addition of new products to existing products being marketed to existing export customers.

Expansion of the existing product line with related products is one such method adopted by many businesses to increase profits, sustain growth and reduce risks.

As a simple example of export product diversification consider the opportunity below.

Product Diversification For Rice Imports and Exports

By deversifying the investment of USD 1 million in a shipment of rice to West Africa to include pasta and spices export diversification will increase the profitability of each shipment and decrease the turnaround time of each investment.

This gives an extra 4 rotations of the original capital each year and doubles the annual return on investment. Assuming an investment of USD 1 million in the form of an irrevocable, confirmed L/C on sight basis, please look at the following comparisons

Traditional Rice Import Investment: USD 1 million

  • Product: Rice
  • Buyer’s Profit: 5%
  • Price: USD 600/ MT
  • Average Quantity Purchased: 1,666 MT
  • Profit/ MT: USD 30

Results:

  • Time Required to Sell 1,666 MT: 45 – 50 Days
  • Total Profit: USD 50,000 per rotation – USD 400,000/ year
  • Annual Return on Investment (%): 40%

Rice Export Diversification Proposal Investment: USD 1 million

We not only reduce the costs of products for our buyers, but we also allow them to create a diversified mix of products using the same distribution network, so that risk of loss is reduced and potential for sustainable profit on the amount of invested capital is increased.

Products:

  • Rice USD 500,000
  • Assorted Spices USD 250,000
  • Assorted Pasta USD 250,000

Buyer’s Profit:

  • Rice 5%
  • Assorted Spices 7%
  • Assorted Pasta 10%

Price:

  • Rice USD 600/ MT Average
  • Assorted Spices USD 2,000/ MT Average
  • Assorted Pasta USD 1,175/ MT Average

Quantity Purchased:

  • Rice 833 MT
  • Assorted Spices 125 MT
  • Assorted Pasta 213 MT

Profit:

  • Rice USD 25,000 or USD 30/ MT
  • Assorted Spices USD 17,500 or USD 140/ MT
  • Assorted Pasta USD 25,000 or USD 118/ MT

Results:

  • Time Required to Sell: 30 – 35 Days
  • Total Minimum Profit: USD 67,500 per rotation – USD 810,000/ year
  • Total Profit Increase (%): 35% per rotation
  • Annual Profit Increase from 4 extra rotations: USD 2,70,000
  • Annual Return on Investment (%): 81%