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This is to certify that the

thesis entitled

ECONOMIC AND MARKET FEASIBILITY
OF PACKAGING MICHIGAN POTATOES IN
INSTITUTIONAL SIZE RETORT POUCHES

presented by

Donald Lee Hinman

has been accepted towards fulfillment
of the requirements for

MASTER Wdegree in Mural Economics

Major professor

Date November 6, 1990

0-7639 MS U is an Affirmative Action/Equal Opportunity Institution

 

 

PLACE IN RETURN BOX to remove this checkout from your record.
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ulna-o:

ECONOMIC AND MARKET FEASIBILITY OF PACKAGING MICHIGAN
POTATOES IN INSTITUTIONAL SIZE RETORT POUCHES

By

Donald Lee Hinman

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

MASTER OF SCIENCE

Department of Agricultural Economics

1990

é 55- 02730

ABSTRACT

ECONOMIC AND MARKET FEASIBILITY OF PACKAGING MICI-HGAN
POTATOES IN INSTITUTIONAL SIZE RETORT POUCHES

By
Donald Lee Hinman
Packaging potatoes in institutional size retort pouches is analyzed as a possible market
outlet for Michigan potatoes. A two-pronged research approach involves estimation of unit
costs of retort pouch potato products (RPP) and an assessment of the market potential for
RPP in the food service industry. Break-even costs for a six-pound pouch is estimated to
be $2.62 (44¢ per pound), which translates to a likely price disadvantage relative to
competing products. Food service operators expressed general satisfaction with existing

potato products and will not readily switch to use of retort pouch potato products.

(Copyrnfluzby
ENDDDAIJDILEIEIIUNLIAUV

1990

To Carroll S. Hinman, whose memory I cherish and whose dedication
to public service will always be a source of inspiration

iv

ACKNOWLEDGEMENTS

I am very grateful to Dr. Thomas Pierson for suggesting the thesis topic, arranging the
funding, and guiding my work. I learned a great deal about potatoes and the food industry in the
process. I also want to express my appreciation to the Michigan Potato Industry Commission and
the Agricultural Experiment Station of Michigan State University, whose financial support made this
research possible. The other thesis committee members were Dr. Jerry Cash from the Department
of Food Science Human Nutrition and Dr. Allen Shapley, Department of Agricultural Economics.
Dr. Cash’s knowledge of food processing was most valuable in getting this research completed. Dr.
Shapley’s thoughtful comments and suggestions were quite helpful and improved the final product
considerably. Finally, I wish to thank my fellow graduate students for the camaraderie that made

the graduate program so much more enjoyable.

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION ........................................ 1
BACKGROUND» AND IMPORTANCE ............................. 1
Problems in the Michigan Potato Industry ...................... 2

The Need for Expanding Processing Opportunities ............... 3
ORGANIZATION OF THE THESIS ............................... 4
CHAPTER 2: RESEARCH OBJECTIVES AND METHODS .................. 6
THE RESEARCH PROBLEM .................................... 6
Objectives .............................................. 7

The Value of This Research Approach ........................ 8

METHODS AND PROCEDURES ................................. 9

Visits To Food Processing Facilities .......................... 11

Contacting Equipment Manufacturers and Distributors ........... 11

CHAPTER 3: AN OVERVIEW OF THE RETORT POUCH ................. 13
WHAT IS A RETORT POUCH? ................................. 13

Retort Pouch Construction: Roll-Stock and Pre-formed Pouches . . . . 14
A Variation in Retort Pouch Construction: Use of Formable

Pouch Material .................................... 15

Pouch Size ............................................. 16
ADVANT AGES/ DISADVANT AGES OF RETORT POUCHES ......... 17
Advantages/Disadvantages for the Food Processing Firm ......... 17
Advantages/Disadvantages for the Consumer/End User .......... 24
Advantages/Disadvantages for Marketing Channel Participants . . . . 26
System-Wide Energy Savings ............................... 27

CHAPTER 4: MARKET EXPERIENCES WITH RETORT POUCH FOOD

PRODUCTS ................................................. 29

CHRONOLOGY OF TECHNOLOGICAL AND MARKET
DEVELOPMENTS ...................................... 29

RETAIL RETORT POUCH FOOD PRODUCTS IN NORTH
AMERICA ............................................. 3 1

vi

Entrees in Retort Pouches (North America) ................... 31

Other Market Segments (North America) ..................... 35
THE FOREIGN EXPERIENCE IN RETORT POUCHES ............. 36
US. MARKET RESULTS AND FUTURE PROSPECTS .............. 38
VEGETABLES AND FRUITS AND IN RETORT POUCHES .......... 42
General Aspects of Retort Pouch Packaging of Vegetables and
Fruits ........................................... 42
Potatoes in Retort Pouches ................................ 44
CHAPTER 5: DETERMINATION OF PROCESSING COSTS ................ 48
THE COST ANALYSIS PROCESS ............................... 48
Determination of Annual Use Cost .......................... 49
Cost Collection Framework ................................ 51
COST CALCULATIONS: PROCESSING PLANT OWNERSHIP AND
OPERATION .......................................... 53
Specification of Plant Operations and Operating Conditions ....... 54
Organization of the Cost Information ........................ 59
A Five-Step Procedure for Calculating Annual Ownership Cost of
Equipment ....................................... 60
Input Cost Items in Tables 1-5 .............................. 62
RESULTS OF THE COST ANALYSIS ............................ 71
Summary of Annual Costs ....................................... 71
Sensitivity Analysis ....................................... 83
CHAPTER 6: MARKET POTENTIAL ASSESSMENT ...................... 89
RETORT POUCH FOODS AND THE FOOD SERVICE MARKET ..... 89
THE INTERVIEWEES ......................................... 91
VIEWPOINTS OF INSTITUTIONAL WHOLESALERS ON MARKET
PROSPECTS ........................................... 92
FOOD SERVICE BUYER ATITTUDES TOWARD RETORT POUCH
POTATOES ............................................ 97
ATTRIBUTES OF RETORT POUCH POTATO PRODUCTS .......... 98
OTHER FACTORS RELATED TO MARKET POTENTIAL ........... 103

CHAPTER 7: SUMMARY OF KEY FINDINGS AND

ASSESSMENT OF POTENTIAL SUCCESS ........................ 105
TECHNICAL CHALLENGES IN ESTABLISHING AND OPERATING
THE PLANT ........................................... 106
SUMMARY OF MARKET PROSPECTS .......................... 106
CONCLUSIONS AND IMPLICATIONS ........................... 109
LIMITATIONS OF THE RESEARCH AND SUGGESTED
EXTENSIONS .......................................... 1 10

vii

APPENDICES

APPENDIX A
PLANT CAPACITY FOR INSTITUTIONAL SIZE RETORT POUCH
POTATO PRODUCT .................................... 113
APPENDIX B
CALCULATIONS - WASTE DISPOSAL AND WATER USE ........... 114
APPENDIX C
COST OF ELECTRICITY ...................................... 116
APPENDIX D
FUEL OIL FOR BOILER ...................................... 117
APPENDIX E
DURATION OF PLANT OPERATION PER YEAR .................. 118
APPENDIX F
TECHNOLOGICAL DEVELOPMENTS IN POUCH CONSTRUCIION . . 119
APPENDIX G
EQUIPMENT CHOICES FOR THE MODEL PLANT ................ 121
APPENDIX H

TABLE 10 - STRUCTURE OF CAPTTAL RECOVERY ANNUITY ..... 137

viii

LIST OF TABLES

TABLE 1 - ESTIMATED ANNUAL OPERATING COSTS FOR A
PROCESSING PLANT FOR PACKAGING POTATOES IN RETORT
POUCHES .................................................. 75

TABLE 2 - ESTIMATED INITIAL INVESTMENT REQUIREMENTS AND
ANNUAL OWNERSHIP COSTS: EQUIPMENT FOR A RETORT
POUCH PLANT FOR PACKAGING POTATOES ................... 77

TABLE 3 - ESTIMATED INITIAL INVESTMENT REQUIREMENTS AND
ANNUAL OWNERSHIP COST FOR A RETORT POUCH PLANT
FOR PACKAGING POTATOES: LAND, BUILDING, AND SEWAGE . . . 79

TABLE 2a - CALCULATION OF ANNUALIZED COST OF EQUIPMENT ..... 80

TABLE 3a - CALCULATION OF ANNUALIZED COST OF INITIAL
INVESTMENT IN BUILDING AND EQUIPMENT .................. 80

TABLE 4 - ESTIMATED ANNUAL ADMINISTRATIVE COSTS FOR A
PROCESSING PLANT FOR PACKAGING POTATOES IN RETORT
POUCHES .................................................. 81

TABLE 5‘ - ESTIMATED ANNUAL COST SUMMARY FOR A
RETORT POUCH PLANT FOR PROCESSING POTATOES ............... 81

TABLE 6 - COMPARISON OF RETORT POUCH POTATO PRODUCT
MANUFACTURING COSTS AND WHOLESALER PRICES FOR
I COMPETING PRODUCTS ..................................... 83

TABLE 7 - BASELINE COST FIGURES COMPARED TO LOW AND HIGH
COST SCENARIOS FOR PACKAGING POTATOES IN
INSTITUTIONAL SIZE RETORT POUCHES ...................... 87

TABLE 8 - BASELINE COSTS PER POUCH AND PER POUND OF
PACKAGING POTATOES IN INSTITUTIONAL SIZE RETORT
POUCHES AND COMPARISON TO HIGHEST AND LOWEST COST
ALTERNATIVES ............................................. 88

TABLE 9 - FOOD SERVICE INTERVIEW RESPONSES ................... 95

LIST OF FIGURES

FIGURE 1 - SUMMARY OF THE COST ANALYSIS PROCESS ............. 52
FIGURE 2 - STAGES IN PACKAGING POTATOES IN RETORT POUCHES . . 56

FIGURE 3 - FLOW DIAGRAM OF STAGES IN PACKAGING POTATOES
IN RETORT POUCHES ....................................... 58

CHAPTER 1: INTRODUCTION

Michigan potato growers, especially growers of round white potatoes, have
expressed concern that there is insufficient demand for their product and that developing
and implementing new processing methods may be one way to improve that situation.
This research considers the feasibility of establishing a plant to process potatoes
employing a packaging technology not currently used in Michigan, the [91213—299211-
The research has two main parts: 1) determination of the costs of establishing and
operating a commercial scale plant, and 2) performing a preliminary market potential

assessment within the food service industry.

BACKGROUND AND IMPORTANCE

Potatoes are an important cash crop for Michigan. The 1.1 billion pounds
produced in 1987 were valued at close to $57 million.1 The bulk of Michigan
potatoes are produced by about 400 major producers located in several regions of the
state. The two highest producing counties are Montcalm County in west central
Michigan and Bay County in the Thumb region.

There are two major types of potatoes grown in the US: white potatoes
and russet potatoes. Round whites are the most common kind of white potato, and
these varieties are grown mainly in the Central and Eastern states. Russet potatoes are
grown most extensively in the Northwestern states. Both types are grown in

Michigan.

 

1Michigan Department of Agriculture. 19 8 'c i a od a d 1 acts.

1

2

One half of Michigan potato production consists of round white varieties.2

A number of independent packers (many of them also growers), supply round whites for
the fresh tablestock market. Several chippers (manufacturers of potato chips) also

provide outlets for growers of round whites.

Problems in the Michigan Potato Industry
Chase argues that Michigan has great potential for expanding its potato
industry. Michigan is endowed with the basic production factors: suitable climate and

3 Also available are

soil, water, interested growers, and available acreage.
transportation facilities and nearness to substantial population centers, and an
established processing industry.

Since Chase made those arguments, however, the departure of Ore-Ida has
raised concerns within the Michigan potato industry about market outlets. There
are also other negative factors that impede the development of a more
progressive and viable potato industry in Michigan. Several key shortcomings are
discussed below.

Potato yields that are consistently below the national average result in higher
per unit production costs that negate the lower distribution costs enjoyed by Michigan

4

over Western growing areas. Present production, handling, and storage methods

 

2Lisa Allison, "A Comparative Cost Analysis of Packing Assorted Sizes and Small,
Medium, and Large Sizes of Round White Potatoes in lO-Pound Consumer Bags in
Small and Large Potato Packing Plants" (MS. Thesis, Department of Agricultural
Economics, Michigan State University, Michigan State University, East Lansing, 1986).

3Richard W. Chase, "Project Description: Improved Production and Utilization for
Michigan Potatoes," Department of Crop and Soil Sciences, Michigan State University,
East Lansing, 1985.

4Chase.

3

result in potatoes that arrive on the fresh market or are delivered to processors’ plants
with less than desirable quality characteristics.

Tight quality standards, uniform sizing and centralized packing, all characteristic
of the potato industry in the US. northwest, are largely absent in Michigan. Michigan’s
independent packing operations usually pack to USDA #1 size standards with sizes
ranging from 1 7/8 to 3 1/2 inches. The range of potato size within a single bag, and
the presence of misshapen potatoes, mar the quality image for both wholesale buyers
and consumers. In the US. northwest, the small, overly large, and misshapen potatoes
are sorted out and the "sort-outs” are sent for processing (often into starch and flour).
There is a relationship between the fresh market quality problem of Michigan potatoes
and the lack of remunerative outlets for sort-outs. Establishing a processing plant that
could provide such an outlet might also enhance the economic incentive to improve the

fresh market quality through improved sorting.

The Need for Expanding Processing Opportunities

This research was undertaken on the premise that the problem of limited
marketing opportunities for growers of round white potatoes could be addressed by
investigating the feasibility of alternative processing methods to those now in use in
Michigan. The purpose of providing additional marketing outlets for growers through
expanding processing opportunities would be to increase total sales of round white
potatoes as well as providing an outlet for sort outs from fresh packing. However, it is
recognized that other varieties may also be appropriate candidates for the processing
methods, including russets and relatively new varieties such as Yukon Gold and

Michigold (which have a yellow, rather than white, flesh).

4

Food scientists and packaging specialists at Michigan State University indicate
that one of the processing technologies that merits further investigation is packaging
potatoes in retort pouches. This package is essentially a "flexible can." In the
proposed retort pouch plant, raw peeled potatoes would be placed inside a pouch which
is then sealed and retorted, yielding a sterilized, shelf-stable, cooked product. One of the
pouch’s main advantages is its thin profile compared to a can, which results in less time
and energy required for sterilization. The reduced heating time allows the potato to
maintain an improved texture since the need to sterilize potatoes in the center of
standard cylindrical cans overcooks potatoes on the edges. Also, canned potatoes
require added liquid (usually brine in the case of canned vegetables). Much less liquid
is likely to be required for the retort pouch potato products, and perhaps none,
depending on the product form. Potato products in retort pouches would be would be
shelf-stable (requiring no refrigeration before opening), and may have shelf lives similar

to cans; however, research experience at this time is insufficient to be more definitive.

ORGANIZATION OF THE THESIS

The thesis is organized as follows. Chapter 2 defines the research problem and
explains the methods used to carry it out. Chapter 3 outlines the development of the
retort pouch, including technological aspects. Chapter 4 focuses on the experiences of
firms that have attempted to market food products packaged in retort pouches. Chapter
5 details the cost estimate per pouch and per pound for production of retort pouch
potato products based on the model plant. The retort pouch packaging process is
illustrated with a flowchart and a description of the stages in processing. Chapter 5 also
explains how specific cost elements are estimated. Some sample calculations are

provided for illustrative purposes. Chapter 6 covers the results of the attitude survey of

5

food service buyers and institutional wholesalers toward the concept of using retort
pouch potato products in their operations. Chapter 7 summarizes key points from
previous chapters and provides as assessment of the prospects for this potential food

product innovation, retort pouch potatoes.

CHAPTER 2: RESEARCH OBJECTIVES AND METHODS

This chapter begins by stating the research problem and explaining the three
major objectives of this research project. The methods and procedures used in carrying
out the research are then described, emphasizing the value of combining cost analysis
with an assessment of market potential based on interviewing food service buyers and
wholesalers.

THE RESEARCH PROBLEM

The basic question to be answered is: are there unexploited processing
opportunities for Michigan potatoes? The particular processing method to be
investigated in this regard is packaging potatoes in retort pouches. A key aspect of
determining feasibility is to estimate the costs involved in setting up and operating a
single small scale plant. "Small scale" in this instance is defined as a plant with one
retort pouch filling machine and the complement of equipment necessary to keep that
one filler operating at or near capacity. The methods and guidelines developed in this
study can be used in follow-up work, such as investigating the costs of plants with
different layouts, kinds of equipment, and levels of output.

The research problem has another element in addition to knowledge of
costs: will the product sell? Of the two major market segments, retail supermarket
operations and food service operations, focusing exclusively on the food service market
is an appropriate goal for this study for several reasons. First, new and different
products often find better initial acceptance in food services than if offered for sale on
supermarket shelves. That is, many precooked entrees first achieve acceptance in
restaurants and subsequently as consumer retail products. Frozen hash browns and

chicken nuggets are examples.

7

A second factor is that supermarket test marketing has been done on retort
pouch products, and it has met with very limited success. Despite early projections that
the retort pouch would make significant inroads into the canned food market, several
pouch manufacturers and food manufacturers found that retort pouch foods did not

catch on with consumers.1

The future of retort pouch foods in the general retail
market is thus somewhat questionable. Even if sales through retail outlets including
supermarkets are an eventual goal, the institutional market is the appropriate area to

investigate for an initial investigation such as this one.

Objectives
One objective of this research is to familiarize potential decision makers with
some key issues surrounding possible adoption of this food packaging innovation.
Among the technical challenges to be faced are selecting the type of retort pouch and
pouch filling machinery for the proposed plant.

The second objective is to estimate the costs of establishing and operating a
small scale commercial retort pouch plant for packaging potatoes. Small scale in this
instance is defined as a plant with one retort pouch filling machine and the equipment
necessary to keep the filler operating at or near capacity. Cost figures are a necessary
component in the determination of whether investment in this kind of plant is likely to
be profitable. In addition, the cost figures provide an estimate of the cost per unit of
product which facilitates the market potential aspect of the research. Costs are
presented in a way that allows potential decision makers to take certain cost elements,

substitute alternative estimates, and recalculate unit cost.

 

1Stanley Sacharow, "Why the Retort Pouch Failed in the USA,” PagLaging (London,
England) 54:645 (December 1983): 33-34.

8

The third objective is to determine the potential acceptance of these products
by various elements of the food service industry. This attitude assessment will provide
insights regarding likely food service market acceptance of the product - ie, what are the
requisites of, and barriers to successful marketing of this product to the food service
industry. A subgoal is to determine the characteristics of retort pouch foods that tend to

make a food service operator more (or less) likely to purchase this product.

The Value of This Research Approach

The second and third objectives combine cost estimation with attitude
assessment of potential buyers. A two-pronged research approach is an appropriate
means to investigate the problem of the potential for expanded processing opportunities
for Michigan potato growers. This new potato product would compete with canned,
frozen and fresh products already on the market. The cost information resulting from
this research facilitates useful comparisons of production costs of the proposed new
product with market prices of its competitors. At the same time, interviews with
potential buyers reveal perceptions of the usefulness of this new product in food service
operations. Respondents can offer their opinion about the product with the knowledge
of the approximate cost of the new product relative to the prices they pay for their
currently used potato products, such as fresh, frozen, or canned potatoes.

In many feasibility studies, assessments of profit potential are undertaken.
Commonly used methods to investigate economic feasibility are to estimate costs over a
predetermined time horizon and calculate the internal rate of return or net present
value. However, revenue projections would be highly conjectural in the case of
institutional size retort pouch potatoes because the product has never been marketed in

the US. Thus, the financial component of this study is limited to the cost side. New

9

product costs, competing product prices and assessments of likely market acceptance of
the new product provide highly useful, though not definitive, guidelines to Michigan

potato growers concerning the likely success of such a venture.

METHODS AND PROCEDURES

The first phase of the project involves estimating the costs involved in
establishing and operating a processing plant for preparing and packaging retort pouch
potatoes. An economic engineering approach is used to specify a model plant. Fixed
and variable costs of owning and operating the processing facility are estimated and used
to calculate unit costs per pouch and per pound of finished product.

Although the cost estimates are presented in a manner designed to be as
realistic as possible, the model plant method is based on certain assumptions, including
the capacity of the plant as well as days and hours of operation. The figures are
intended to serve as a guide for subsequent efforts to establish more precise
budgetary estimates.

The food service buyer attitude assessment phase of the research consisted
mainly of personal interviews with the principal food buyers of food service operations in
the Lansing area and with executives from leading institutional wholesaling firms in
southern Michigan. The Lansing area provided an adequate cross section of the kind of
operations that would be potential purchasers of retort pouch potato products.
Emphasis was placed on conducting interviews with a participant interactive approach.

Interviews with a selected, though not statistical, sample of institutional food
buyers provided a useful assessment of the likely acceptance of this product. A majority
of sales of these potato products would likely be made through institutional wholesalers

rather than direct to end users - restaurants and other food service institutions.

10

However, assessing in addition the attitudes of restaurant managers other food service
end users (who are the customers of the institutional wholesalers) is a means of
determining the wholesalers’ likely willingness to carry the product.

In concept-based market research, the attributes of a potential new product are
communicated verbally, in writing, through the use of visual aids such as photographs,
and through displaying or describing similar products. In this project, interviewees were
shown samples of retail-sized retort pouch food products, photographs of retort pouch
foods, empty sample pouches, and an institutional size retort pouch containing 4
kilograms (8.8 pounds) of vegetables obtained from Ebbrecht, a German food
manufacturer.

Interviews focused on examining both the current use of potato products by
each of the food service operations and the potential uses for retort pouch potatoes. A
key aspect was to ascertain attributes which were important and unimportant in terms of
impacting or influencing the likelihood to buy this product. Respondents offered their
opinions and perceptions of the products and whether they were likely to sue them after
being told the approximate costs of the new products relative to currently used products,
such as fresh, frozen, or canned potatoes.

Managers from institutional wholesale firms were interviewed to obtain their
perspective on the current and future use of potato products and to provide a
cross-check on the information in the other interviews.

A key factor in identifying key people with knowledge of retort pouch food
product processing and marketing was attending one of the semiannual meetings of the
Research and Development Associates for Military Food and Food Packaging Systems,

Inc. Since the military is by far the largest purchaser of retort pouch food products in

11

the US, this meeting brought together any of key people in this small, specialized
industry.
Visits To Food Processing Facilities

Visiting various food processing facilities was an important step in gaining
familiarity with the nature of food processing and packaging methods. At an early stage
in the research process visits were made to the plants of Mid-American Potato Company
(Grand Rapids, Michigan) to become familiar with how potatoes are handled, and the
Fennville, Michigan plant of Michigan Fruit Canners, Inc., to see the equipment and
processes involved in canning fruits and vegetables. Studying the layout of the carrot
canning line at that latter facility provided useful insights from which to begin developing
the model plant which was the object of this study. Personnel at both plants provided the
names of equipment manufacturers and distributors.

Two plants that packaged food products in retort pouches were also visited, and
discussions with their plant personnel on both technical aspects of retort pouches and on
their marketing experiences proved to be valuable; these plants were Magic Pantry in

Hamilton, Ontario, Canada and the Nabisco (Del Monte) plant in Lockport, New York.

Contacting Equipment Manufacturers and Distributors
With the help of the various academic and industry experts consulted, a list of
food processing equipment manufacturers and distributors was compiled. Various firms
were contacted to obtain figures on machinery prices, capacities, and associated labor
needs to run the equipment. A description of the proposed processing method (see
Chapter 5) was provided to guide them in drawing up the appropriate lists of equipment.
The first step in this information-gathering process was to determine the

appropriate capacity of key pieces of machinery. Since the purpose was to develop a

12

small-scale plant, the model plant was designed with a single form/fill/seal machine;
Koch, Inc. supplied a cost estimate. Stock America, a well-known retort manufacturer,
was contacted and their Automat 1300 model was included in the cost estimate; given
the capacity of the 1300 retort, it was decided that two units would be required to allow
the form/fill/seal machine to operate at its capacity. The remaining work involved
determining the appropriate complement of equipment to use which would allow the
retorts and filler to operate efficiently, given their output capacities.

An estimate was made of the quantity of raw potatoes required to keep the
retorts and the filler operating at near capacity (see Appendix A, page 113). Using this
information, an equipment distributor in Milwaukee, Wisconsin (BFM, Inc.) provided the
equipment cost information for a potato canning line minus the actual can closing and
sealing equipment (which, in the model plant is replaced by retort pouch form/fill/seal
equipment). The BFM executive also provided an estimate of the number of people
required to run this equipment. The specific list of equipment, the prices of those items,
and the estimate of the associated labor needs to run that equipment, which was
provided by BFM, was altered somewhat in consultation with executives from several

other processing plants visited.

CHAPTER 3: AN OVERVIEW OF THE RETORT POUCH

This chapter begins by explaining different kinds of retort pouches and why one
kind was chosen as the appropriate type for the model plant. The second part of the
chapter explores the attributes of retort pouch foods in terms of what advantages and

disadvantages they may have relative to other food packaging methods.

WHAT IS A RETORT POUCH?

One objective of this research is to familiarize potential decision makers with
some of the technical challenges and choices among alternatives they will have to make
in attempting to set up a retort pouch plant. This section begins by explaining
alternative methods of retort pouch construction (that is, the different layers of material
that make up the pouch laminate) and which alternative was chosen for the model plant.
The size of pouch chosen as the basis for estimating plant costs is also explained and this
section closes with a brief mention of other technical challenges facing potential
investors in a retort pouch plant.

The retort pouch is a flexible package made from a laminate (several layers
joined by adhesives) of three materials: polyester, aluminum foil and polyolefin (or
polypropylene, depending on the pouch material manufacturer); hereafter whenever
reference is made to the polyolefin layer, it is understood that polypropylene could be
substituted for that layer. As the name implies, the retort pouch is capable of being
retorted. In other words, foods are first sealed in the retort pouch, followed by heat
sterilization as in a canning process. Food products contained in pouches of this basic

construction have been marketed commercially in the US. since 1974. More recently,

13

14

entree retort pouch products have been marketed with a non-metallic layer in place of
the aluminum to allow for cooking in microwave ovens.

Retort pouches are designed to withstand the thermal processing temperatures
and pressures that are required in food processing operations. The food product inside
the pouch can achieve the same level of sterility as canned food, but with a shorter
"cook" time. This reduced thermal processing time can mean both energy savings and
higher quality food when compared to canning. These are considered to be two of the
pouch’s chief advantages.

Each of the three layers of packaging film serves a distinct function, and
experimentation has been carried out on a number of materials since the late 1950’s to
select the most effective combination (see Appendix F, page 119). The inner layer of
polyolefin performs two functions. Since it is inert, it does not react with any of the wide
range of food products with which it may come in contact; it resists fat, oil and other
food component penetration. Secondly, polyolefin is capable of strong heat seals that
are necessary to withstand the pressure and high temperatures encountered in retorting.
Aluminum was selected since it was one of the lower cost materials capable of providing
a barrier against light, moisture, microorganisms, and gases (particularly oxygen). The

outer polyester layer provides strength and printability.1

Retort Pouch Construction: Roll-Stock and Pre-formed Pouches
In clarifying just what is meant by the term retort pouch, there is another issue to
consider. One pouch-filling method involves the use of pre-formed pouches purchased

from a pouch manufacturer. An alternative is for the food manufacturing company to

 

1David A. Heintz, "Marketing Opportunities for the Retort Pouch," Food
Melon. 34-

 

15

make and fill pouches using roll stock of three-layer laminate on a form/fill/seal
machine. Two separate laminates or ”webs” are fed into the machine and are joined
(sealed) on three sides; the food product is then pumped, placed, or extruded into the
vertically-held pouches. Then the vacuum is drawn and the fourth side sealed. In this
method, both webs are usually of the same thickness. Vertical filling either with roll
stock or preformed pouches is the most common method for packaging retort pouch
food products. Another method, described in the next section, involves the use of

laminates of two different thicknesses and horizontal filling.

A Variation in Retort Pouch Construction: Use of Formable Pouch Material

The "typical”, pre-made retort pouch has two sides or webs of the same thickness,
and is generally filled vertically. In contrast, an alternate pouch construction involves
. using a lower web which is thicker than the upper one. Using a horizontal filling
method, the lower web is pulled downward so that it conforms to a die or mold as it
travels through the filling area of the form/fill/seal machine. In industry terminology,
the web is ”drawn" or ”deep drawn” into the die. After the food product is placed into
the tray-like cavity, an upper web covers the food and the package is sealed. The lower
web is thicker than the upper web to withstand the additional stress that it must undergo.
The resulting package is somewhat more rigid than vertical-fill pre-made retort pouches.
Some in the food packaging industry therefore do not consider this second kind of
package to be a "true" retort pouch. There is little industry agreement on what to call
this container with webs of different thicknesses to distinguish it from "typical" retort
pouches with two webs of the same thickness. Some refer to it as a W;
the thicker gauge laminate is called IQDDLle retort pouch material. Two food

16
processors that use this packaging method are So-Pak-Co (Mullins, South Carolina) and

Land O’Frost (Lansing, Illinois).

However, there are only two firms that manufacture horizontal form/fill/ seal
machines for large retort pouches. The Multivac form/fill/seal machine from Koch, Inc.
(Kansas City, Missouri) employs this kind of technology and was selected for the model
plant. Horizontal filling is more likely to maintain several pounds of potatoes in good
condition than would vertical filling. The form/fill/seal machine whose estimated price

appears as part of the plant cost estimate in Table 1 on page 75 is a Koch Multivac.

Pouch Size

Since there are as yet virtually no US. firms currently packaging foods in
institutional size pouches, there are no standard institutional sizes or even widespread
industry agreement on what is an institutional size retort pouch. Beverly’s view is that
institutional pouches can vary anywhere from 10" X 14" to 12" X 18".2

A pouch size of 10.5" X 15" X 1.4" was determined to be an appropriate size to
use for estimating the costs of owning and operating a plant for packaging potato
products in retort pouches. The criterion for choosing that size was that those
dimensions for length and width allowed for a racking configuration (placement of
pouches on retort racks) that made for effective use of space in a Stock Automat 1300
retort. Increasing the pouch width from 10.5" to 12", for instance, would have allowed
the placement of only four rather than six pouches per retort rack, meaning there would

be many fewer pouches per retort load. The depth of the package (1.4") was the

 

2R.G. Beverly, J. Strasser and B. Wright, "Critical Factors in Filling and Sterilizing
Institutional Pouches," W (September 1980), 48.

17

maximum ”depth of draw” of the Koch Multivac form/fill/ seal machine selected for the
model plant.

Attempting to maintain flexibility by gearing up to produce several pouch sizes
may not be cost effective; the racks themselves are expensive (estimated at $90)
and should only be used for one size of pouch. Even a small-scale plant such as the
model plant discussed in this chapter requires 400 racks to handle a single pouch size.

The model plant in this study assumes a single size pouch.

ADVANTAGES/DISADVANTAGES OF RETORT POUCHES

There are benefits and drawbacks to a food production and marketing innovation
such as packaging food in retort pouches. These need to be examined with regard to
competing systems of food packaging and distribution, specifically, canning and freezing.
Furthermore the arguments need to be examined in terms of who captures the benefits
or bears the cost. Therefore, the advantages and disadvantages of retort pouch food
packaging will be examined with regard to their effects on: (1) the food processing firm,
(2) consumers/ end users and (3) marketing channel participants including wholesalers

and retailers.

Advantages/Disadvantages for the Food Processing Firm
1. 99mm. To compare the packaging costs of retort pouch foods to the
canned and frozen counterparts, it is not just the pouch itself that must be considered,
but also the outer carton in which pouches are frequently placed for extra protection and
the cost of the shipping container. The outer carton, in which all retail-sized pouches
have been sold in the US, made the pouch more expensive than its steel can

counterpart. However the institutional size pouch was expected to cost less than the #10

18

can, partly because it is anticipated that no outer carton will be needed. However, this
cost savings will be partially offset by the fact that a considerably stronger shipping
carton will be needed for pouches than for cans. Dwire estimated in 1982 that the costs
for packaging sliced carrots were $4.38 per case of six #10 cans compared to $3.08 per
case of 12" X 15" pouches.3

The trend in material costs must also be considered. The #10 can cost will
follow closely the cost of steel, which is unlikely to fall and will probably rise rapidly at
times. The same is likely also true of the aluminum component of the retort pouch.
However, the cost of polyester and polyolefin will probably rise much more slowly,
possibly leading in the future to a greater cost advantage in the future for pouches

relative to cans.4

However, cost calculations explained in Chapter 5 indicate a cost
disadvantage for pouches.

2. o a ace. A frequently cited advantage of retort pouch foods is their
shelf stable nature, which may afford a considerable reduction in refrigerated storage
space compared to frozen or refrigerated foods.

Due to the shape of the containers, pouch foods make more effective use of
"available space"; Dwire estimated percentage use of available space at 95% for pouch

5

foods versus 78% for cans. However, this advantage maybe more than offset by the

 

3Patricia E. Dwire, ”Pouch Technology Seminar - Notes,” Unpublished company
report, American Can Company (Greenwich, Connecticut), 10 June 1982.

4Robert Beverly, ”Sterilization Methodology Applied to Pouches and Trays, " in Food

Sciences Institute, Purdue University, oceed e e ence: 3
W 14 15 March 1979

5Eugene Giannattasio, Louis Lacchin and Daniel Nelson, “The Feasibility of the
Retortable Pouch Replacing the No.10 Can in the Institutional Food Service Market"
(MBA Student Report, McMaster University, Hamilton, Ontario, Canada), 10.

l9

fact that cans can be stacked up to 20 feet deep compared to 4 to 5 for pouches due to
their more fragile nature.6

One considerable advantage for the pouch is in terms of in-plant storage of
empty containers. Pouch material, either in the form of rolls of laminate or premade
pouches will take up only a small fraction of the space required by empty cans.

3. LE e speeds. Retail size pouch filling speeds in particular are quite slow in
relation to the speeds of typical canning lines. Top pouch filling speeds of 200 per
minute have been reported, but the typical speeds in the US. and Canada are in the
30-60 per minute range and most are closer to the lower end of that range. Some firms
have resorted to running a number of pouch filling lines simultaneously to increase
output, but this adds considerably to the capital and labor cost. Canning lines can handle
400.800 cans per minute.7 Pouch lines will typically also have a higher rejection rate
than a canning line due to faulty seals and other problems. This will be especially so for
new firms getting themselves established. This problem can also be made worse by
attempting to push up production rates to unrealistic levels. At a 1986 conference of
firms producing retort pouch foods for the US. Army, a quality control study indicated
that running lines too fast meant that a number of inadequately processed pouches got

past the line inspectors resulting in an unacceptable number of leaking pouches being

shipped out.8

 

6Giannattasio, 6.

7Patrick Kwan, "The Retort Pouch," EEQDLIQIS Weston Research Center, March
1981,3. Cited in Giannattasio, 11.

8Research and Development Associates for Military Food and Packaging Systems,
Inc., "Report by the Meal, Ready-to-Eat (MRE) Task Force,” Annual Fall Meeting,
Natick, Massachussetts, September 1986.

20

The disparity in line speeds is not as great when comparing #10 can lines and
lines for filling institutional size pouches. #10 can lines run at around 50 cans per
minute; 50 units per minute is also not unusual for some frozen food lines (though
boil-in-bag lines may run at 120 units per minute). There is no comparable track record
for institutional size pouch lines; during the course of this study, this researcher did not
find any firms packing vegetables or other products comparable to the potato products
that are the subject of this study, except for one firm that is packaging fruit slices.
However, the estimated speed of the form/fill/seal machine included as part of the
”model plant” cost estimate in the next chapter is 10 pouches per minute. A food
machinery manufacturer indicated they were developing a prototype that could fill large
pouches at 50 per minute; however, that would probably be for sauces and soups.
Particulates such as potatoes require slower speeds.

4. M. Retort pouch plants are quite labor intensive. There are a
number of functions which are typically automated in canning lines but that are not so
easily automated in pouch operations. The quality control procedures tend to rely on
visual inspection, so a number of inspectors are required. Contractors supplying the
Army are required to perform two ”100% inspections” - that is, each pouch must be
inspected before and after retorting. The slower line speeds may also not justify
automation in packing in shipping containers or palletizing. Dwire estimated in 1982 that
the comparative labor costs per case of sliced carrots in #10 cans and in 12" X 15" food
service pouches was 21¢ and 47¢, respectively.9

5. WW. There are large transportation cost savings

in transporting empty pouches compared to the equivalent capacity of cans. This is most

 

9Dwire.

21

pronounced in the case of large pouches; one truckload can carry the equivalent in

pouches of 36 trucks of empty #10 cans.10

This is of course an issue only if the food
processing firm transports the containers; otherwise, it is just part of the delivered cost
of the container. The shipping weight of filled containers is also much lower. This is
due largely to the fact that because of the pouch’s thin profile, it is not awry to add
nearly as much liquid. The amount of brine, syrup, or juice may be 1/2 to 2/3 less.
Also, the institutional pouch itself weighs only 15% as much as a #10 can, according to
Dwire’s estimate.11

Cans can withstand more vigorous treatment than pouches. The extra care
needed for handling pouches and moving them in and out of storage will add to a firm’s
costs.

6. Marketing cost. Launching any new food product usually requires
considerable advertising and promotion expenditure, and retort pouch food products are
certainly no exception. The vast majority of retail size retort pouch food products have
been meat based, and several firms have test marketed entrees and then have pulled
them off the market. This attests to the fact that a considerable consumer education
effort will be required to convince consumers to trust the concept of meat-based entrees
that are not refrigerated or frozen. Canned and frozen foods are well established in the
market, but any firm undertaking sales of retort pouch foods will likely incur substantial
costs in the form of advertising and promotion.

The institutional market, however, may not require such high promotional

expenses. Many fewer buyers have to be convinced, and food service operators are in

 

10Dwire.
11Dwire.

22

general more willing to experiment with alternative food products that offer cost,
convenience, or other attributes.

8. W. There will be substantial costs to the firm for selecting
the specific food products to be produced and sold. With canned and frozen foods, once
the formulations have been established, there is a large amount of experience to draw on
to determine the proper methods to sterilize and package the food. With retort pouch
foods, however, ”the general technical sophistication, knowledge, and experience” is
considerably less.12 Sizes are not standardized, so choosing the correct size for the
market segment becomes important. It is costly to have the capability to package several
sizes of pouches, so it is important to choose the size correctly at the outset. After the
formulations and size(s) have been chosen, other factors in product development include
determining the proper sterilization method, and setting up the best means to ship the
pouches; important considerations in shipping are the strength of the shipping carton,
the height to which cases can be stacked, whether the pouches should be shipped with a
horizontal or vertical orientation, and the appropriate number of pouches per shipping
case. Because there is as yet so little production of retort pouch food products, these
development costs represent a substantial burden, relative to canning and freezing

methods, to any firm attempting to launch a retort pouch operation.

9. 1W. The Williams study indicates that due to the
pouch’s thinner profile, it takes 30-50 percent less time to reach sterilizing temperatures

13

at the center of the food than it does for cans or jars; substantial fuel savings in

 

12Jeffery R. Williams,”An Economic Analysis of the Feasibility of the Retort Pouch
for Packaging Fruit and Vegetable Commodities in an Environment of Rising Energy
Prices" (Ph.D. dissertation, Department of Agricultural Economics, Michigan State
University, East Lansing Michigan, 1980), 31.

13Williams, 30.

23

making hot water and steam are evident. This amount of reduced time will vary
considerably with the product: in 1982 Dwire indicated that the sterilization time for 12"

X 15" pouches of sliced carrots was 70 minutes compared to 80 minutes for a #10 can of

the same product. The can thus requires 14% more time. 14

A 1982 report from one of the laminate manufacturers, Reynolds Metals, makes

the following argument on energy savings:15

”In-plant energy consumption of a retort pouch food operation is
already far less than for freezing food, about on a par with canning.
As energy costs escalate during this decade, this cost differential will
become more dramatic...economic analysis shows in-plant energy
costs for frozen food to be four times more costly than shelf-stable
pouches by 1990. Opportunity exists for even greater energy savings
by taking advantages of the pouch’s reduced sterilization time in
continuous retorts.”

Energy prices have not accelerated as fast as was expected when that report was
written, so the magnitude may not be that great; however, a substantial savings is still
possible.

10. Ingredient Qst. Large cans require substantial quantities of brine, syrup, or
juice to aid in the transfer of sterilizing heat to the food contents. The thin profile of
the pouch makes much of this unnecessary; one study indicated that while a #10 can of
sliced carrots would contained 30 ounces of water, the equivalent pouch would require

only 7 ounces.16

 

14Dwire.

15Reynolds Metals Company, Richmond, Virginia, ”Flex-Can Laminate Pouch
Comparative Analysis -- Executive Summary,” Unpublished company report, 1 October
1982.

16Dwire.

24

11. W. The initial capital outlay for a retort pouch food line is
higher than the canned or frozen food equivalent; one estimate indicated a tenfold
difference between a canning line and a pouch line (though not for the whole plant).17
However, it is important to note that the amortization of the capital investment is a
small portion of the annual cost per unit (see Table 5 on page 81 in Chapter 4). A
Reynolds Metals report argues that ”cost savings gains in packaging, energy and
distribution will more than offset disproportionate capital requirements. In addition,
second generation, highly efficient filling and retorting equipment is expected to be
developed which should make the retort pouch capital outlay fall somewhere between

canned and frozen food."18

Advantages/Disadvantages for the Consumer/End User

1. [food gualig. Mermelstein points that the thinner profile of the pouch means
that the product near the surface of the container is not overcooked, as it may be with
cans or jars. He contends that most products’ quality is generally maintained in a
pouch -- the product is truer in color, firmer in texture, fresher in flavor, and there is
likely less nutrient loss. More specifically, "because of the shorter processing time...foods
will undergo less thermal deterioration which means less carmelization of sugars and
starches, less breakdown of protein, less destruction of heat sensitive vitamins, and less
hydrolysis of flavor components. This is especially‘true for seafood, high quality entree

items, and sauces."19

 

l7Giannattasio, 11.
18Reynolds Metals.

19Neil H. Mermelstein, ”Retort Pouch Earns 1978 IFT Food Technology Industrial
Achievement Award,” mm (June 1978): 22-23.

25

Some have argued that retort pouch food product quality approaches that of
frozen food.20 Others have even a more favorable view: "The product is as good or
better than frozen and over an extended period the quality favors the pouch - a 6-month
old pouch is better than a frozen entree which may have undergone several freeze-thaw
cycles in distribution."21 There are those with experience in the food industry who
contend, however, that as yet no retort pouch products can really match the quality of
frozen food, especially regarding the color of vegetables and some other
components.22
2. Snfgty. Safety is an issue in food service operations. Dropping a 100 ounce #10 can
on one’s foot can cause considerable injury, as can the sharp metal edges of the open
can. Metal slivers from a can may also fall into the food. Pouches have none of these
problems.

3. Disngsnbfljty. Pouches are as easy to dispose of as frozen food containers and
pose much less of a problem than empty cans, which take up much more space.

4. Convenience 1n' nzenagntign. Pouches are easy to open, tearing from a notch
in the seam, and no can opener is required. Fewer pots and pans will be required in
preparation; the food can be heated by placing the pouch directly in hot water. One
person points out that one point in favor of food service adoption of more retort pouch

foods is that their use requires little or no change in existing equipment; for instance, the

W (frequently found in food service kitchens for keeping food warm) adapts

 

20Office of Technology Assessment, "Emerging Food Marketing Techniques: A
Preliminary Analysis,” 1978. Cited in Williams, 15.

21W "Real Test of Retort Pouch Potential Due As Packer
Interest Begins to Quicken,” November 1981.

22Williams, 26.

26
easily to pouch use. Pouches can be placed horizontally in the gently simmering water
and removed and opened at any time. Another advantage is that no thawing will be

needed, as is required for some frozen foods.23

5. WWW. One advantage of frozen food over canned is
that just the amount needed can be thawed; it lends itself to pnfljnning better than
canned foods. Small size pouches can also be designed to provide single servings to the
specifications of special diets in hospitals food services. On the other hand, one
disadvantage of pouch foods is that since they are little used as yet, there are no
standard sizes, and thus few food service recipes. Many food service recipes today are
designed around #10 cans. Depending on the various technical factors involved, the
quantities of potatoes determined to be optimal to place in large pouches may or may
not correspond to the quantity in a #10 can.

6. Refrigerated nnd fiozen storage space can be economized with the use of

retort pouch foods.

Advantages/Disadvantages for Marketing Channel Participants
1. Whglesnlg; wanehnuse handling. A disadvantage from the wholesaler’s
perspective is that pouches will likely require more care in handling; potentially rough
treatment in a warehouse will have less serious consequences for cases of cans than for
cases of pouches. Pouches also will make less effective use of vertical space in that
pouches will probably not be able to be stacked more than 4 or 5 deep, and cans can be

stacked several times that high.

 

23Keith M. Ebben, "Producing Pouches and Trays to Meet Particular Needs." §_e_e
Food Sciences Institute, 27-30.

27
2. W. Retailers may have more reason to favor retort

pouch foods than their customers. Consumer surveys have indicated that shelf stability
(no need to refrigerate) is not the main concern of consumers in selecting foods, so this
may not be a strong selling point. In addition, as previously noted, many consumers do
not trust the idea of non-refrigerated meat products. However, retailers are increasingly
concerned about the crowding of their frozen food cases, and may welcome the
opportunity to promote shelf-stable entrees. An estimate made in 1981 indicated that
"frozen food display cases account for 38% of the average supermarket’s energy

bill...in-store energy savings on retortables can range from 8-17c."24

System-Wide Energy Savings

It is also instructive to note some of the arguments made on behalf of retort
pouch food packaging systems in terms of energy savings. These estimates were made
in the early 1980’s but nevertheless may provide a general idea of the possible energy
savings associated with the retort pouch. Mermelstein reported that from harvest to
consumption the total energy required was about 60% less for vegetables in retort
pouches compared to frozen vegetables. When compared to canned vegetables, retort
pouches required approximately 15% less energy.25 A 1982 Reynolds Metals report
estimated that ”frozen food distribution costs are close to 25% higher than the equivalent
retort pouch system...including all of the secondary packaging. Also in the Reynolds it

was established that it would "cost three times as much to distribute a frozen entree

 

24W-
25Mermelstein 1978. Cited in Williams, 31.

28

versus the same product in the established, streamlined version of the retortable

pouch."26

 

26Reynolds Metals.

CHAPTER 4: MARKET EXPERIENCES WITH RETORT POUCH FOOD PRODUCTS

This chapter begins with a brief chronology of several key market and
technological developments in the evolution of the retort pouch foods. The numerous
difficulties encountered by various firms in their attempts to make a commercial success
of pouched foods are outlined, followed by some propositions on why most of them
failed. The commercial success in Japan is also noted. Most of the efforts at
commercialization have emphasized meat-based entrees, but the final two sections

explain the efforts to date in packaging vegetables in general, and potatoes in particular.

CHRONOLOGY OF TECHNOLOGICAL AND MARKET DEVELOPMENTS
Two different manufacturers of retort pouches are mentioned in the
chronology below. One firm has been referred to at various times in its history as
Continental Can, Continental Flexible Packaging (division of Continental Can), and
Ludlow Flexible Packaging. Below it is referred to as "Continental” and then as
”Ludlow”. Another manufacturer, Reynolds Metals Company, is referred to as "RMC“.
Another firm mentioned is a food processor named ITT Continental; despite the

similarity of names, it should not be confused with Continental Can.

1959 - US. Army, Continental, RMC start preliminary development and testing
efforts

1960-68 - Continental supplies pouches for US. Army tests and supplies retort
pouch technology to licensees in other countries; RMC supplies testing
equipment and pouches to a Wisconsin firm

1967 - First commercial market introduction of retort pouch food products -

sliced meats and sausages sold in England (Continental license to Otto
Nielsen)

29

30

1968 - Retort pouch commercially introduced in Japan (Continental license to
Toyo Seikan); Japanese market later becomes largest in world - over 400
million pouches in 1985.

1969 - Retort pouch foods reach the moon with Apollo astronauts.

1969-73 - US. Army contract to Swift and others to establish production
capabilities; Army tests viability of complete equipment system for cake,

fruit,- and meat-based items; development of 30 pouch per minute
form/fill/seal machine.

1973-76 - Development of machinery lines in England (Metal Box, Ltd.) and Japan;
retorts and pouch form/fill/seal machines developed by European and
Japanese companies, plus Bartelt and FMC in US.

1974-75 - Potato products in retort pouches introduced by Nu-Foods (Michigan)
and Creston Valley Foods (British Columbia, Canada); Lustucru in
France introduces line of vegetables including potatoes.

1975 - Approval of pouch as a food container withdrawn by Food and Drug
Administration (FDA) pending further studies.

1977 - Approval granted by FDA to Continental and RMC; ITT Continental
Baking is first to enter US market with line of entrees; Hormel launches
line of entrees targeted at camping market.

1978 - USDA authorizes use of retort pouch foods in US. Army rations. Magic
Pantry begins operations in Canada.

1978-79- Lustucru (France) invests in high-speed automatic retort pouch line for
vegetables (first outside of Japan) but shuts down the following year; the
two potato product operations in North America, Nu-Foods and Creston
Valley, cease operations.

1980 - Magic Pantry expands Hamilton, Ontario plant to 50,000 sq. ft. and
becomes the largest North American facility totally devoted to retort
pouch food packaging. 3 firms begin test marketing - Specialty Seafoods,

Libby, Kraft 1980-81- Introduction of prototypes of fill/seal machines
for institutional size pouches; Ludlow introduces institutional pouch
(Pantry Pack HRI).

1981 - IT'T Continental drops its line of retort pouch products.

1985 - Kraft drops its line of retort pouch entrees.

1987 - Angelus introduces prototype of high-speed filler for large pouches

31
RETAIL RETORT POUCH FOOD PRODUCTS IN NORTH AMERICA

Efforts at retail marketing of retort pouch foods can be considered in several
categories. The first category is firms that introduced entrees with the idea of
developing a line of products that could be eventually be marketed nationally through
retail outlets, particularly supermarkets. Another set of firms focused on more limited,
specialized market segments. Some of those firms introduced entrees, but others had
such varied items as seafood, salad dressing, and fruits and vegetables. Subsequent
sections will describe the experience with fruits and vegetables in general, and with

potatoes in particular.

Entrees in Retort Pouches (North America)

Four firms have introduced entrees to be sold in supermarkets - ITT Continental
Kitchens (subsequently part of RJR-Nabisco), Kraft, Miss Molly and Magic Pantry. The
first three are US. firms, and the fourth is located in Ontario, Canada. The majority of
these entrees were single-serving (8 ounce) beef-based meals, though some used chicken,
pork, or veal. Certain mid-size cities were chosen for test marketing. By mid-1985 , only
Magic Pantry and Miss Molly were still producing retort pouch entrees for the general
retail market. Miss Molly was based in Knoxville, Tennessee and marketed a line of
entrees that were "co-packed” (packaged under contract) by Magic Pantry. ITT
Continental and Kraft had ceased production (other firms were, however, producing
entrees for certain specialized markets - see next section). The parent company of
Magic Pantry acquired the St. Louis - based Kretschmar, Inc., through which they began
to market retort pouch meat products in 1986; the products are packaged at the

Hamilton, Ontario plant. These marketplace results are discussed in more detail below.

32

Test marketing for Continental Kitchens Division of ITT Continental Baking
Company began in September 1977. Their production facility was expanded when
market demands outstripped supply. Their Flavor Seal product was displayed near
canned meat items and above freezers where the frozen dinners were located; the pouch
was advertised as a substitute to both categories of goods. Test markets were expanded,
but results were not as favorable. Williams noted that two issues that appeared to affect
sales were the price of the product and its positioning in the store. Average prices for
their 8 ounce entrees in 1979 were just under $2.00. Attempts to locate the optimum
supermarket sales location ranged from canned meats, frozen foods, dried soups, and

boxed dinners section.1

In 1980, Continental Kitchens underwent a series of ownership
changes, finally ending up as part of RJR-Nabisco in 1986. In 1981, while the retort
pouch facility was in the Del Monte division, a shift in marketing philosophy was evident
from the addition of the Deli On Your Shelf line - sandwich fillings and two kinds of
potato salad (deli-style and German). Consumer testing had indicated the need for
low-priced retortables not commonly found in prepared forms elsewhere; these items
were to be positioned in the prepared dinner section. The above mentioned acquisitions
were viewed by some as an important breakthrough for the retort pouch because of Del
Monte’s marketing knowhow and its commitment to the development of retortable
packaging technology. The fact that Del Monte was part of a broader-range food

company (RJ. Reynolds) was viewed as a possible key to success in national markets.2

 

1Williams, 20.
29nd; Eggzgn Fonns.

33

However, all of the items were subsequently dropped and Del Monte has since used the
equipment exclusively to produce pouch foods for the military.3

Kraft introduced several entrees under the M label in 1980. A survey of
wholesalers and national grocery chains indicated that a large percentage would try the
pouch entree line.4 The Kraft line had considerable introductory support - TV and
print advertisements, direct-mail couponing, sampling, in-store demonstrations and
product publicity.5 This line was also positioned in the prepared dinner section; one
writer noted that their criterion for product introduction was ”fashionable but familiar.”
Retort pouch products were viewed as convenience foods; the firms involved were aiming
at marketing a distinctly different and readily identifiable food product. These firms are
able to spend a good deal on product research and development and promotion of the
product. Competition among these firms was related significantly to advertising and
promotion. Kraft’s primary competition was ITT Continental and Stouffer’s, the latter of
which was the national leader in frozen entrees.6 One view of Kraft’s primary target
was that it consisted of the significant portion of US. households occupied by singles,
young, and childless couples, older "empty nesters" whose children have left home, or

7

larger families who members have varied eating schedules. Early test market results

indicated good repeat purchases and favorable sales forecasts. Nevertheless, by 1985,

 

3Jack Mans, "Retort Pouch: Military, Retail, and Food Service," M-
(May 1985).

4Williams, 23.
SQuigk Exogen Eonds.
6Williams, 23.

7W.

34

Kraft apparently decided that it did not meet their sales requirements and the entire line
was dropped.

Magic Pantry’s stated intention was not to compete with frozen or canned. Their
initial product was Ukrainian cabbage rolls. A company official indicated in 1979 that
more products were being planned to compete with home cooking, using only ingredients
that a housewife has at home and avoiding the use of chemicals. They were also

packaging pouches for the Canadian Armed Forces.8

They subsequently expanded
their product line to include meat-based entrees. In 1985-86 they began co-packing for
Miss Molly, Inc., in the US. The Miss Molly test market area included Michigan. An
employee of a Grand Rapids, Michigan supermarket who was familiar with the Miss
Molly brand commented that they had tried to position it at several places in the store:
in a mid-aisle display in front of the frozen dinners; in the prepared dinners section; and
finally in the section where they sold rice. In none of those places was their any
significant movement, so by March 1987 they decided no longer to carry the line. A
representative of Magic Pantry indicated in early 1987 that they had not received orders
from Miss Molly for several months. The ultimate success of that product is thus very
much in doubt.

As noted above, Kretschmar, Inc., is a processor/packer of fresh meats in St.
Louis, Missouri, which was acquired by the parent firm of Magic Pantry. In preparing to
launch a new line of retort pouch foods, note was taken of the market results of the
pioneering firms. Beginning in 1986 a different marketing approach was attempted -

precooked meat entrees in all-plastic microwaveable retort pouches. Even though the

pouches are shelf stable, the Kretschmar line has been positioned in the fresh meat

 

8Roman Dacyshyn, "Products Suitable for Pouches and Trays: Technical and
Marketing Aspects.” Sen Food Sciences Institute, 82-83.

35

refrigerator cases of grocery stores. Consumer surveys had found that American
consumers are still reluctant to buy unrefrigerated meat-containing products in flexible
packaging; consumers also preferred refrigerated to frozen meats, because they are more
convenient to prepare, requiring no thawing time. Since sales volume in the fresh
refrigerated meat case is declining, this product may provide the different, more

convenient meat products that consumers are looking for.

Other Market Segments (North America)

Two firms have developed lines of meat-based entrees but have made a conscious
decision to focus on the camping/recreational market and sell mainly through retail
outlets that feature sporting and camping goods. The George A. Hormel Company
began production in The fall of 1977 at its Austin, Minnesota, plant. The ease of
handling and preparation, and the superior quality compared to freeze dried foods made
it a succesful market niche. Hormel also supplied retort pouch foods to Sky Lab Foods
in Elmsford, New York, who also catered to the recreational market.

The Van Rich Company in Illinois also sells a number of meat-based entrees
distributed through recreational outlets under its "Smoky Canyon" label. The pouch
foods are packed by Land O’Frost, a meat specialty company that also has a military
contract.

Another successful specialty niche for retort pouches is the market for
nutritionally controlled foods. Nutri/ System sells retort pouch entrees as part of weight
loss/control program through its 700 stores nationwide; their products are packaged by
both Magic Pantry in Canada and Land O’Frost in Illinois. Medical Nutrition of Bogota,

New Jersey, sells 7 ounce low calorie meat items in retort pouches. Gourmet Choice

36

International of Carlsbad, California markets low sodium content retort pouch foods for
people with heart conditions.9

Libby, McNeil], and Libby, Inc., of Chicago, Illinois selected the retort pouch as
the most suitable flexible package for its House Dressing line of concentrated salad
dressings. The dressing is added to an additional quantity of milk before using.
Advantages cited included freshness, ease of dispensing, low packaging cost, and no
bottle breakage.10

Specialty Seafoods of Anacortes, Washington has found another market niche by
using the retort pouch to package its top-of-the-line Gold Seal brand of oysters and
smoked salmon products. It is gift boxed and sold in gourmet food shops and through
"up-scale" mail order catalogs.ll

The idea of mail order meals pioneered by Specialty Seafood has been cited as

an additional target for expanding the retail market. Sales through vending machines is

an another possibility, especially now that microwaveable pouches are available.

THE FOREIGN EXPERIENCE IN RETORT POUCHES
The retort pouch has had its greatest success in Japan. Retort pouch products
were introduced commercially beginning in 1968. Their success has been attributed
partly to the fact that, unlike the US, canned and frozen goods were not f‘u'mly
entrenched in the minds of the consumer. Retort pouch and canned goods "have grown

up together" and were positioned as a convenience food before frozen foods were

 

9Mans.

10David Heintz, ”Marketing Opportunities for the Retort Pouch,” Wm
(date unknown): 32-38, 102.

11Williams, 12.

37

significant; even today, the "cold chain" in Japan is not nearly as extensive as the one in
the US. A 1978 estimate gave retort pouch foods 8.7% of the total packaged foods
market in terms of value; canned and frozen were 59.2% and 32.1% respectively.12
By 1985, supermarkets were selling "a wide variety of food in retort pouches, ranging
from curry and soup to precooked rice and Chinese seasonings.” Curry is a popular item,
containing meat, potatoes, and carrots. 13

In 1979, total EurOpean sales were estimated at 40-50 million pouches,
considered a small market.14 One solid part of the market in which retort pouches
were established was packaging sausage and frankfurters in hard vacuum retort pouches;
Denmark has such brands as Arovit, Plumrose, and Royal Dane; such items are also sold
in Britain.15

After Japan, France had the greatest variety of products and brands in retort
pouches. Nestle’s :Ifrgis quzonngs and Colgate Palmolive’s Whirl compete in
the high price entree market; the volumes remain small. Buitoni sold pizza base and
toppings in pouches.16 In the late 19708 two French firms, Lunar and Lustucru, were

selling vegetables in retort pouches. However, Lustucru ceased selling pouched

vegetables in 1979.

 

12 Yotaro Tsutsumi, "New Technology Applied to Pouches and Future Trends,"
See Food Sciences Institute, 24-26.

13K. Yamaguchi, "Current Status of Containers for Thermo-processed Foods in
J apan,” Address to the International Packaging Conference, Michigan State University,
September 1985.

14Keith Ebben, "Retort Pouch: Latest Developments in Europe," W,
(September 1979): 109-12. Cited in Williams, 24.

15Keith Ebben, "Products Suitable for Pouches and Trays: Technical and Marketing
Aspects." m Food Sciences Institute, 70.

16mm.

38

Early sales forecasts of retort pouch foods tended to vastly overstate the eventual
market position established. Contributing factors appeared to be the oil crises in the
1970’s, high inflation, and the fall in the proportion of food expenditures out of income.
A British laminate manufacturer argued that unrealistic expectations ”created by these
high volumes when not achieved had a definite detrimental effect on people’s attitudes
to and acceptance of pouches in our market place. It is to be avoided in the US."17
As Sacharow points below, however, unrealistic expectations were also generated in the

US.

US. MARKET RESULTS AND FUTURE PROSPECTS

Retort pouches have been characterized as ”one of the big contradictions of the
prepared foods industry. Introduced with glowing hopes...they have more than lived up
to their hype for the military, been a dismal failure in the retail market, and may just be
coming in to their own in food service and industrial markets." The bright spot is military
feeding; it is ”the engine driving the retort pouch market. It has proven to be a booming
success, with each year’s contract larger than the one before.” The 1985 contract was for
40 million MREs (Meal Ready-to-Eat) for $120 million.18 Three nationally known
firms (Pillsbury, Hormel, and Del Monte) and several other firms produce the pouch
foods for the Army. The other firms currently or previously producing pouch foods are
Land O’Frost, Shelf Stable Foods, SoPakCo, Star Foods, Sterling Bakery, and Thermal

Stabilized Foods.

 

17Ebben, "Products." $9 Food Sciences Institute, 70.

18Mans.

39

This generally bright picture, however, was marred by a food safety scandal
involving one of the MRE suppliers which was brought to national attention by the 20/20
television program of ABC News on January 15, 1987. In the newscaster words: "Last
year, the Army had millions of Meals Ready to Eat stored in warehouses waiting to be
medically cleared or condemned. Thousands of others were destroyed as unsafe. There
remains a cloud of suspicion about the safety of the rations, and last fall, the largest
MRE producer, Star Foods, shut down." He also asserted that several other firms had
similar problems, though on a smaller scale. The long-terrn impact of this negative
publicity remains to be seen.19

But what happened in the retail market? Even by 1983 Sacharow had noted that
the retort pouch is ”hardly news anymore." That observation was confirmed by this
researcher in the course of gathering material for this study; the vast majority of articles
on retort pouches were written in the few years just before and after 1980. Most major
food processors have had projects involving retort pouches, but then have drawn negative
conclusions and never gotten as far as test marketing. Sacharow’s views on what went
wrong are instructive. Potential use of retort pouches for pumpable products may have
been displaced by the onset of aseptic packaging, and the delay in FDA approval of the
laminating adhesive was not helpful. More significant factors were probably an overly
optimistic marketing approach, slow machine speeds and technical factors in the nature
of the pouch itself.

A possibly overly optimistic marketing approach was evident back in the 1960’s

when the pouch was first introduced to food processors; it was believed that retort pouch

would replace the tinplate can for commodity type foods. Attempts to use the pouch as

 

19ABC News, 251/20, (Transcript, Show #703) 15 January 1987, 2-6.

40

a package for vegetables and sauerkraut failed. Sacharow believes that the laminate
manufacturers underestimated the importance of the can in the consumer’s mind and the
”time and thought” needed to capture such a huge market. ”Commercialization would
have been swifter if...these converters would have flirted with the more sophisticated
markets such as prepared entrees, camping foods, and HR] markets. It was later
determined that it was these very markets which would be natural for the retort pouch.”
He goes on to point out, "In the United States market, where frozen foods processing,
warehousing transport, and marketing are well established, it is quite difficult to conceive
of products that will be better and cheaper than frozen.” Despite the resources devoted
to the effort by Kraft and ITT Continental, there was apparently not a sufficiently large
”educational and advertising campaign aimed at the consumer to point out that a
shelf-stable flex-pack containing a prepared entree is both safe and acceptable."20
Kretschmar’s decision to market retort pouch meats through the refrigerated meat case
(even though it is shelf stable), shows a recognition of this problem. There is also other
evidence that even if consumers did trust the concept of non-refrigerated meat, they may
still not think it is particularly important characteristic because many do not lack
refrigerator space.21 An additional factor is slow machine speeds. Filling and sealing
speeds of 30-60 pouches per minute on single form/fill/seal machines do not compare

favorably to can operations which are capable of 300-500 cans per minute. Several of the

firms currently packaging retort pouch foods use pre-made pouches, but this option is

 

20Stanley Sacharow, "Why the Retort Pouch Failed in the USA,” Packaging (London,
England) 54:645 (December 1983): 33-34.

21Richard Abbott, "Producing Retort Pouches to Suit Particular Needs.” Sen Food
Sciences Institute, 44.

41

too "cumbersome and costly“ for large volume US food processors, who could use

premade pouches only for short-term market tests.22
Thirdly, the pouch itself is not without problems, in terms of possible stress on
the pouch surface and adequacy of the seals. Very tight quality control is necessary to
ensure safety and proper seals and this has contributed to the pouch’s slow acceptance in
the food industry. Similarly, one observer noted the 'debacles in Europe via packers
who have gotten into the business who thought it looked good - ’let’s take a shot at it.’
And they produced 90% leaking packages; they never did produce a satisfactory closing
seal."23 In addition, it was assumed that the lower sterilizing heat required due to the
pouch’s thin profile would always yield a better quality product; such was not always the
case. Finally, perhaps Sacharow’s strongest argument:24
"...the basic pouch geometry was wrong...the flexible retort pouch is
basically a two-dimensional container and one that has to be unnaturally
distorted to accept product fill. It is this very distortion that creates the
stress points that eventually fracture. Because overfilling tends to
enhance the possibility of wrinkles and pleats in the pouch, and lengthen
the retort time, it must be carefully controlled. The net result is that
many retort pouches tend to be ’slack filled.’ The pouches must also not
exceed three quarters of an inch in depth. In a production operation, the
non-ideal geometry of the flexible pouch for a heat-processed food makes
the cost per package per unit of product disproportionately high. When
the cost of the outer carton is added the net cost often far exceeds cans.”
He points out that more "geometrically sound" alternative systems are in use for
small portion packs in Europe. Heavy gauge laminates are drawn into smooth wall,

semirigid three dimensional containers and are sealed with peelable lids made from

lighter gauge laminates. These firmer containers do not require the individual cartons

 

22Sacharow.

23Alan Corning, "Sterilization Methodology to Pouches and Trays." & Food
Sciences Institute, 93.

24Sacharow.

42
needed to protect the retort pouch.25 Technology similar to this is used by the

form/fill/seal machine included in the plant cost estimate provided in Chapter 4.

VEGETABLES AND FRUITS AND IN RETORT POUCHES

The first subsection offers some comments on the general subject of packaging
fruits and vegetables in retort pouches. The experience of several firms in packaging
potatoes is characterized in the following subsection.

General Aspects of Retort Pouch Packaging of Vegetables and Fruits

In the 1960’s and 1970’s, a number of food industry observers and participants
held the view that retort pouch packaging would be highly appropriate for commodity
products. Fruits and vegetables in pouches would replace at least a portion of the
canned and frozen counterparts. The previous discussion indicated that it did not turn
out that way. Due to the expense to the packaging method and other reasons, retort
pouch packaging has found only a few low-volume specialty niches involving mostly
meat-based high value-added products. There may yet be a market for commodity goods
in large-size institutional pouches, but no firm in the US. is currently attempting this,
with the single exception of Truitt Brothers, Inc., of Salem, Oregon, who is marketing
fruit slices (apples and pears) to food service operations.

"Few commodity processing firms, which tend to compete on efficiency of
operation and distribution instead of brand name and differential product characteristics,
have attempted to enter the market with retort pouches. This is primarily due to the

amount of uncertainty regarding the economic and technical processing and distribution

 

2SSacharow.

43

aspects of such products."26 Those words were written in 1980, but are still largely
true today.

Williams reported on two sets of consumer tests conducted in the 1970’s on the
quality of vegetables in retort pouches. Among the products tested were peas, corn, cut
green beans, and mixed vegetables. The taste of pouched vegetables was found to be
superior to the canned equivalent, and in one case, also better than frozen vegetables;
nevertheless, ”the overall acceptability was less, due to the fact that frozen products had
superior color."27

These generally positive results led to glowing predictions, such as the statement
that, beginning in 1981, "commodity-type foods such as canned corn and green beans,
pears and peaches in #10 cans will be replaced by institution retort pouch packs...the
institutional market should be easier to penetrate with a package and product having
better quality and comparable or lower cost...only a few buyers need to be
convinced...The institutional buyers are trained to recognize quality differences between
products in #10 cans and the same products in pouches."28 A number of the technical
and market factors cited above prevented this from occurring, not the least of which is

the likelihood that pouched fruits or vegetables cannot yet be produced for ”comparable

or lower cost.”

 

26Williams, 24.
27Williams, 26.

28Arthur F. Badenhop and Howard P. Milleville, ”Institutional Size Retort,” Egnd
Mpg. (January 1980): 82-83.

44

Potatoes In Retort Pouches

Several firms in Europe and the United States have attempted to package potato
products in retort pouches. Only one firm continues to do so today: Ebbrecht in
Germany markets institutional size pouches of 19.211111 (shredded potatoes ready for
frying, popular in Germany and Switzerland). Lustucru in France marketed several
vegetables, including potatoes, on a limited basis for about three years. They then built a
facility to expand this operation in the late 1970’s, but that unit had ceased operations
altogether within two years.

Two US. firms have produced German potato salad; this is a high acid product
which has less rigid processing requirements than low acid ones. SoPakCo currently
supplies the military with such a product. The other firm was TTT Continental, which
also produced a low-acid "deli-style” potato salad as part of its Deli On Your Shelf line in
1981; as described above, TIT Continental was bought out and no longer produces any
pouch foods for the retail market.

Two firms, one in Canada and one in the US, attempted to set up operations in
the 1970’s for the sole purpose of packaging potatoes in retort pouches; neither lasted
more than a few years. The Canadian firm was set up around 1975 in Creston,
southeastern British Columbia, under the name of Creston Valley Foods (a.k.a. Swan
Valley Foods). A grower cooperative was one of the interested parties, and exploratory
work was done at the University of British Columbia. Various sources hinted at the
reasons for its demise. One factor may have been the that the project was apparently
launched with the promise of government financial support, which was subsequently cut

off.29 Another was apparently the high cost and low reliability of the film at that

 

29Dacyshyn, "Products." See Food Sciences Institute, 82.

45
time; there were significant delamination problems.30 Creston Valley Foods
packaged potatoes in several forms - silver dollar, crinkle cut, cubes, and french fries.
The silver dollar and french fry cuts in particular also had a problem of sticking together.
Finally, the plant was established in a potato growing area, but was quite distant from
the likely markets in Calgary and Vancouver.
Nu-Foods, Inc. began production in a plant in Edmore, Michigan in November
1974. Their line included sliced, diced, and shredded potatoes for use by their customers
in “preparation of potato salad, mashed potatoes, au gratins, American fries, scalloped

and broasted potatoes." The following quote gives the firm’s description of their

product:3 1

”Potatoes in Chef Farms plastic pouch are selected from the best quality

raw product, sized and graded to eliminate any defects, then peeled in
large commercial peelers with steam pressure. Potatoes are again
inspected for defects, washed and dried on special equipment, then
automatically packaged without added liquid, the air evacuated and the
pouches sealed under vacuum. The product is then processed in special
equipment under special temperatures and pressures to ensure a complete
cook and a sterilized product. The removal of air by vacuum packaging,
absence of packing liquid, and gas-tight seals, assures that maximum
flavor and nutrients are ’locked-in’ every potato piece."

Plans called for expansion to "include sales to institutional wholesalers, direct
large account distribution and possible consumer pack sales to retail chains under the

brand name Chef Farms"32 Nu-Foods also experienced delamination and film quality

 

30William Piper, formerly with Creston Valley Foods, Inc., Creston, British
Columbia, Canada. Personal communication.

31Kelly Harrison, et al, e Michi a otat dust : a ket lsis,
Agricultural Economic Report No. 294. Department of Agricultural Economics,
Michigan State University, East Lansing, Michigan, April 1976.

32Harrison.

46

problems similar to those of Creston Valley Foods. There were other negative factors,
and by 1978 Nu-Foods had also ceased operations.

Interest in this kind of operation has not disappeared, however. Studies are
periodically undertaken. One source indicated in 1985 "a definite project to package
sliced or diced potatoes" by an unnamed firm.33 By 1990, however, no such product
had emerged.

Any attempt at breaking into the food service market with retort pouch products
must take account of the strongly entrenched position of frozen potatoes in food
services. An executive of Trend West, a firm in the western US, indicated that he had
dropped plans to package potatoes in retort pouches because his cost calculations in
1987 had indicated that he could not produce the product for anywhere near the selling
price of frozen potato products with which his product would compete (he estimated the
average price of competing frozen potato products in his area at 20¢ per pound). Scale
may also be an important factor; one estimate was that for a retort pouch firm to
operate profitably, the minimum quantities of raw potatoes processed through the plant
should be 4000-8000 pounds per hour.34

Several technical factors relating to potatoes complicate the search for the
appropriate method for packaging in pouches. One is the sensitivity of potatoes to
oxygen - they tend to darken quickly when exposed to air. This means that peeled
potatoes must be bathed in a chemical solution to maintain the whiteness that is so
important in the consumer’s perception of potato quality. Sulfites are commonly used

for this purpose, but they have come under the scrutiny of the FDA because of possible

 

33Mans, 113.

34Piper, Creston Valley Foods. Personal communication.

47

allergic reactions in some people. Alternatives may have to be found. In addition, air
left in a sealed pouch may also darken the potato pieces. Air removal is a key part of
the filling/sealing process. The methods that remove the most air from a pouch may put
stress on the potato pieces or pouch material; the proper balance must be found.
Finally, much has been made of the problem of the integrity of the heat seals; potato
starch can adversely affect the strength of a seal if it gets on the edges of the pouch.

The history of potato packaging in retort pouches is not propitious. After
examining costs in Chapter 5, Chapter 6 looks at the attitudes of potential buyers of

retort pouch potatoes.

CHAPTER 5: DETERMINATION OF PROCESSING COSTS

This chapter begins by explaining the cost analysis process. The concept of
annual use cost of durable assets is introduced, followed by an explanation of the cost
collection framework, including a figure that depicts how various cost components are
combined to yield the cost per pouch and per pound of packaging potatoes in retort
pouches. Then follows a section that states several conditions related to plant operation
that affect cost calculations. The proposed processing method is explained in detail in
Figure 2 and illustrated with a flow diagram (Figure 3 on page 58). An example shows
how annual use cost is calculated. Specific cost items found in Tables 1 through 5 are
then explained, and cost calculations (per pouch and per pound) are shown. Costs are
presented in detail in Tables 1 through 5, found on pages 75 through 81. Frequent
references are made to these tables. Following the five tables, retort pouch cost per
pound is compared to competing potato product prices. The chapter closes with
sensitivity analysis that examines the impact on unit costs of variations in certain
assumptions.

THE COST ANALYSIS PROCESS
The purpose of this cost analysis is to determine what it costs to package
potatoes in retort pouches. The cost estimate summarizes all fixed and variable costs
into a unit cost that can be compared to the unit sale price of competing potato
products. Even though comparing m of one product to nfgns of competing
products appears akin to comparing apples and oranges, the comparison is nonetheless
useful. For example, if production costs of one product are equal to or greater than

market prices of competing products, it is apparent that the first product will have to

48

49

have a higher market price, putting it at a price disadvantage in the market relative to
existing competing products.

In this study fixed and variable costs are calculated and summarized as annual
unit cost (per pouch and per pound). The annual use cost method of determining fixed
costs is described below, followed by a section that explains how fixed and variable costs

are summed to yield annual unit cost.

Determination of Annual Use Cost

Durable assets are assets that serve to produce other goods, yet are not
"consumed” or used up in a single period. Machinery and buildings fall into this
category. Labor services and materials are resources that are used up in a single
production period such as one year. In contrast, durable assets produce returns and
decline in value over a number of years.

A related consideration is that if money is invested in machinery and buildings,
the income from alternative investments is forgone. Thus astute managerial
decision-making should include this imputed opportunity cost of making an investment.

The annual cost of buildings and equipment thus has two components: 1) the
annual depreciation, or the amount of the facility that is "consumed” in one year, and 2)
the forgone annual income on what would have been earned had the financial resources
been applied to some alternative (opportunity cost).

One form of annualized cost is often referred to in finance literature as an
nnnnity . However, to emphasize that an annuity in this case represents the annual cost

of using durable assets, the term annual use cost (AUC) is employed in this study.1

 

1The term ”annual use cost” comes from class lectures on capital budgeting decisions
by Dr. Roy Black, Department of Agricultural Economics, Michigan State University.

50

The AUC is an annual charge to account for the repayment of invested capital plus
interest that could be earned on the unrecovered balance of the investment (opportunity
cost). The ”cornerstone" of the AUC is the annuity factor (Present Worth of an
Annuity or PWA), which converts a lump sum into an equivalent annuity. Another way
to express PWA is as the present value of a uniform series of payments.

It is thus clear that calculating an annuity to represent the annual use cost of
employing durable assets is a practice that is grounded in established cost theory. This
method is analogous to determining a loan payment given the term and interest rate.
Even though this approach has not been widely applied for cost analyses, it is very
appropriate for this purpose. The application is straightforward; the annuity is calculated
by dividing the original value of the asset by the PWA factor. If a durable asset is
valued at its purchase price of $10,000 the annual use cost would be calculated as follows
(using a PWA factor for 10 years at 9%):

Value at Asset/PWA = $10,000/6.4l77 = $1,558

Table 10 in Appendix H (page 137) shows how the principal and interest relate to
the $1,558 annuity for each year over a 10-year period. This annuity (annual use cost) is
comparable to what appears in column 13 of Tables 2a and 3a (page 80). Table 2a
presents how the annualized ownership cost of machinery is calculated, based on the
machinery costs provided in Table 2. Similarly Table 3a presents annualized land and
buildings costs related to costs provided in Table 3. However, in Tables 2a and 3a there
are additional steps taken in calculating annual use cost of durable assets (beyond the
simple division in the formula above) that account for estimated salvage value at the end

of durable assets’ useful life and for the tax savings from the stream of depreciation.

. /—._.

51

The specific calculations are discussed on page 60 in the section entitled "A Five-Step
Procedure for Calculating Annual Ownership Cost of Equipment.”
Cost Collection Framework
Figure 1 on page 52 shows how costs were categorized to summarize the annual
investment and operating costs of the plant. Operating (variable) costs are those
directly attributable to plant operation, including hourly labor wages, material, utilities
and operating capital.

The first elements listed under equipment costs are annualized costs of durable
assets. Other costs, including repairs, taxes, and insurance, are added to yield annual
ownership costs of equipment. Building and land costs are calculated in an analogous
manner. Administrative costs include salaries and fringe benefits of the managerial staff,
whose work is not directly related to the number of hours of plant operation. The sum
of the four components yields total annual cost. Total annual cost represents all costs
except for: a) the cost per pound of potatoes in each pouch, and b) brokerage. The
reason for separating out these costs and adding them subsequently is so that future
users of this research can supply their own estimates. Potato costs vary substantially
depending on sources of supply, time of year, and variety. Brokerage cost is the only
selling or marketing expense which is included in the cost estimate. Three percent was
suggested as a reasonable estimate. Selling costs other than brokerage such as trade
promotion and advertising take such a wide variety of forms and vary so much in amount
that it was judged best to leave these costs out of the calculation. Thus, costs as
determined are likely to be somewhat understated.

As shown in Figure 1, total annual cost divided by total number of pouches
produced per year results in total annual cost per pouch. In the next step, total annual

cost per pouch is summed with the cost of potatoes packaged in each pouch, plus

52

brokerage cost. The sum of those three items equals cost per six-pound package. Cost

per pound is calculated by dividing cost per pouch by the number of pounds per pouch.

FIGURE 1 - SUMMARY OF THE COST ANALYSIS PROCESS

 

OPERATING COSTS

Hourly Labor Cost ) Annual
X No. hrs. per yr. )8 Labor
+ Fringe benefits ) Cost

+ Materials

+ Utilities

+ Operating
Capital

3 Annual Oper-
ating Cost

 

 

 

EQUIPMENT COSTS

Total Value of Equipment + PWA -
Annualized Cost

of Equipment

+ Repairs

+ Taxes

+ n ranc

- Annual Ownership Cost

[PWA 8 Present Worth of an Annuity]

 

 

BUILDING AND LAND COSTS

Total Value of Building + PHA =
Annualized Cost
of Building

+ Land Cost

+ Repairs

+ Taxes

+ n urance

- Annual Ownership
Cost

 

 

 

ADMINISTRATIVE COSTS

Salaries of Managers and
Permanent Employees

+ Frinqe Benefits
= Annual Administrative Costs

 

 

COST SUMMARY

Operating Cost
+ Ownership Cost-Equipment
+ Ownership Cost-Building.Land
+ ini r iv

Total Annual Cost

 

 

 

COST PER POUCH AND PER POUND

Total Annual Cost + Total No. Pouches -
Total Annual Cost per Pouch
I
Total Annual Cost per Pouch
+ Potato Cost (6 lbs. per pouch)
+ r r 3 of r .
Cost per Pouch of RPP
I
Cost per Pouch + No. lbs./pouch .
Cost per Pound

 

 

 

 

53

The unit cost per pound of the retort pouch potato product is the key figure that
results from the analysis. It provides the best available estimate of the minimum (break-
even) cost for which the retort pouch potato products could be produced. No assumption
is made as to an appropriate marketing margin covering profits. Users of this cost
estimate can determine what margin is acceptable and/or possible given market

conditions.

COST CALCULATIONS: PROCESSING PLANT OWNERSHIP AND OPERATION
The main cost collection process was limited to determining processing and
handling costs from the "front door to the back door" of the plant. That is, the first
operational stage of the model plant is receiving raw potatoes and the final stage is
placing finished product into temporary storage preparatory to shipping. These

boundaries were placed on the cost estimation process to keep the analysis manageable.
This section begins by noting certain assumptions regarding plant specifications
and operating conditions. Next a ”Description of Stages in Processing Potatoes in Retort
Pouches" explains in sequence the process required to package potatoes in- retort
pouches. A corresponding flow diagram follows the description. What follows is a
discussion of how the cost information is organized, with an example demonstrating the
method of calculating "annual use cost" of durable assets. The subsequent subsection
entitled ”Summary of Annual Costs” describes how the total cost figure is converted into
a unit cost figure (per pouch and per pound of finished product). This unit cost is then
compared with the prices of competing potato products. In the next subsection,
sensitivity analysis is used to point out the range of possible variation from the central

cost estimate. Finally, reasons for the high cost of retort pouch processing are suggested.

54
Specification of Plant Operations and Operating Conditions

Three key assumptions for the "baseline” calculations are given below. In the
sensitivity analysis, certain "baseline” factors and assumptions are varied to determine the
effect on the product cost.

1. Hnngs 91 Ofiratin - This study assumes that the plant will operate on a
Schedule of two eight-hour shifts per day, five days per week. Eight months of
operation per year is considered to be the most likely option, since the plant could
operate using only Michigan potatoes. In contrast, year-round operation would require
purchase of potatoes from out of state for four months out of each year. Eight months
of operation translates to 2880 hours of operation per year. Year-round operation (52
weeks) works out to 260 days or 4160 hours. As part of the sensitivity analysis, separate
cost calculations are made based on varying the number of months of operation per year.
Appendix 5 shows the number of hours per year corresponding to different number of
months of operation per year.

2. Qnenajrn' g standagd - Certain rules of thumb were determined, including the
amount of ”down time“ for a processing line as well as the percentage of the raw product
that will end up as finished product -- that is, the amount of potato waste from peeling,
culling, and trimming. In consultation with plant managers of two leading Michigan
potato processing firms, it was determined that about 1% hours would be a good
estimate for time used up in breaks and lunches in a 16-hour day. Thus 14.5 hours is
considered to be the actual number of hours of plant operation in a 2 shift per day
operating schedule. An average loss of 45% of the weight of the raw potato to waste

would be a reasonable assumption, assuming that the bulk of the potatoes supplied to

55

the plant are of grade US. #1 or higher.2 For B’s, the proportion of waste would be
greater.

3. W - To arrive at a cost figure per pouch, the costs for given unit
of time must be calculated and then divided by the volume of output for that time
period. Periods that are convenient from an accounting and managerial point of view

are a quarter and a year. A year is the costing period in this study.

 

2Generally accepted potato industry standard from Professor Jerry Cash,
Department of Food Science and Human Nutrition, Michigan State University.

56
FIGURE 2 - STAGES IN PACKAGING POTATOES IN RETORT POUCHES

Stage 1 - RECEIVING POTATOES

The potatoes are unloaded from the trucks and move along an inclined conveyor to a
water bath destoner. The product continues up to a grading reel, where the potatoes are
separated into wholes, slicers, and dicers. Both are conveyed to their respective storage
bins; the plant will process one or the other at a time. A take-away conveyor carries the
whole or sliced potatoes to the plant infeed conveyor.

Stage 2 - POTATO PREPARATION

Once the product is in the plant, a hydro-lift/destoner removes the stones and elevates
the potatoes into the washers. A brush washer removes dirt and a preheater brings the
product temperature up in preparation for the peeling. An elevating conveyor with a
surge hopper controls the batching operation of the steam peeler.

The steam peeler removes the peel and a discharge auger removes the potatoes from the
batching hopper of the peeler; this step helps ensure the continuous flow of product
through the remainder of the processing operations. All abrasive roll scrubber removes
the excess peel (”tags"). A retention auger removes other impurities mixed in with the
potatoes.

A waste auger picks up the trash from the roll scrubber and transports it to the sludge
pump; the sludge pump moves the waste to trucks.

A hydro-pump moves the potatoes from the peeling area to the inspection area; a
dewatering shaker removes the excess water. The potatoes are channeled onto an
inspection table where 6 inspectors sort out bad and unpeeled potatoes and do some
trimming. The potatoes move to a slicer/ dicer unit (including take-away conveyor).
The sliced potatoes move into a surge tank (dip tank) with sprays (of whitener solution
for potatoes) and discharge conveyor. Whole potatoes skip the slicing/dicing
operation and move directly from the inspection table to the surge tank.

If plain potatoes (sliced/diced/small whole) are to be packaged, the potatoes go into a
solids filler (or one of a series of fillers) that has a gravity feed which drops a
predetermined weight (i.e., 6 pounds) of potatoes into containers. These containers are
conveyed to the filler via a circulating conveyor.

If additional ingredients are to be added to make a value added product (i.e., potato
salad or soup), the potatoes do not go into the gravity feed hoppers, but instead go into
a mixing vat. The other ingredients are added to the vat at this point. The mixture is
transferred manually into containers for weighing and then conveyed to the pouch filling
machine.

Stage 3 - PRIMARY PACKAGING

The filler is a horizontal form/fill/seal that uses two rolls of laminate. The lower web is
"deep drawn” into a tray-like cavity. The containers arrive by conveyor from the previous

57

stage. An operator at the filling machine manually dumps the contents into the open
pouch area. If the product is plain potatoes, a small quantity of brine is added, air is
evacuated by a mechanical vacuum and the pouch is sealed. At this point a pouch
coding machine sprays ink onto the pouch surface to identify the pouch lot.

Each pouch is check-weighed, then conveyed to an accumulation area preparatory to
retorting.

The containers will circulate on a conveyor until the contents are placed in a pouch. The
empty containers will go to a washing area before being reused.

Stage 4 - THERMOPROCESSING

Pouches are placed six to rack, which are in turn placed in cages/baskets and are
stacked 15 deep. Prior to being placed in the racks, the first of two ”100%" inspections is
performed - every pouch must be examined for defects (punctures, incomplete seals, etc.)
and defective pouches are discarded. The cages/baskets are wheeled into the retorts.
A complete retort cycle takes 1 hour and 45 minutes with a ”cook time" of about 50 min
at 250°F. The remainder of the time is loading, coming up to temperature, cooling
down, and unloading.

After the retort is unloaded, the cage/basket is wheeled over to an area where the
racking process is reversed - racks are lifted out one by one and the pouches removed.
Here the second 100% inspection takes place - workers examine each pouch for defects
(the same as in the previous stage, but delaminations may be more in evidence at this
stage) and sends them on a conveyor to a drying machine.

Stage 5 - SECONDARY PACKAGING

When the pouches emerge from the dryer, they are conveyed to the station where they
will be placed in shipping containers. A 48-inch diameter discharge type pack-off table
circulates the pouches continually until the workers can pick them up for placement into
the fiberboard shipping containers (shippers). The shippers are picked up and formed to
the proper shape by hand, and then the workers place the pouches into the shippers. A
total of six pouches are placed into each shipper, separated by fiberboard dividers. A
key factor in maintaining pouch integrity in shipping is for the pouches to fit snugly and
to move as little as possible inside the shipper. If some pouches are not completely
filled, yet are within a predefined tolerance, extra dividers may be placed in the shipper
to maintain the tight fit. The open shipper is then conveyed to a taping machine which
tapes both top and bottom of the shipper at the same time.

Stage 6 - PALLETIZATION AND STORING

The full shipping containers arrive in the palletizing area and are stacked on pallets
manually. Full pallets are covered by stretch wrapper which will help maintain their
stability during shipment. The full pallets are moved by forklift to the finished product
storage area to await shipment.

58

FIGURE 3 - FLON DIAGRAM OF STAGES IN PACKAGING POTATOES IN RETORT POUCHES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stage 1 - UNLOAD DESTONE SIZE TEMPORARY
Receiving TRUCK ‘ = SEPARATION ->1 STORAGE
Potatoes
Stage 2 - HASH
Potato PREHEAT < POTATOES < DESTONE *<
Preparation
Other > r
Ingredients MIX IN VAT
STEAM scnua orr INSPECT/ SLICE/ SURGE TANK/ HEIGl-I
PEEL P» REMAINING ->- TRIM ->~ DICE —>- HHITENER BATH b7 PORTIONS "l
PEEL
PUMP HASTE l REMOVE
TO TRUCKS -< PASTE
Stage 3 - CHECKNEIGH CODE FILL/SEAL
Primary - POUCH ~< ‘ POUCH ‘ POUCH :
Packaging I
Iiiépeci'I 3.133? I
Stage 4 - POUCH OPERATE RETORT POUCH ;:[: POUCH
Thermopro- ->-RACKING ‘ Load/Unload >< DERACKING >- DRYING
cessing
Stage 5 - CLOSING/SEALING LOAD POUCHES INTO
Secondary SHIPPING CONTAINER < SHIPPING CONTAINER ‘
Packaging
Stage 6 - STACK ON FINISHED LOAD TRUCKS
Palletization >- PALLETS >4 PRODUCT ‘ FOR SHIPMENT
and Storage STORAGE

 

 

 

 

 

 

 

 

 

59
Organization of the Cost Information

One objective of this portion of the study is to determine annual costs of the
fixed inputs (durable capital assets) over their varying life spans while accounting for the
cost of capital and depreciation. To carry out this procedure, certain cost factors must
be selected for use in the calculations, specifically, cost of capital (discount rate) and
appropriate depreciation periods for the building and equipment. The cost of capital
was chosen to be equal to the yield of an alternative investment; long term Treasury bills
were. designated as the alternative investment and they were yielding around 9% at the
time of the study.

The appropriate period over which to depreciate the capital assets is the
estimated useful life of the asset. The standard factors for depreciation were
determined through interviews with personnel from food processing firms and from
reviewing other cost studies: 10 years for all equipment and 25 years for buildings. In
actual food processing firms various depreciation methods would be used, depending on
specific tax situations of the firms. However, determination of optimal tax strategy is
not among the objectives of this project, so straight line depreciation, the simplest
depreciation method from a computational point of view, is used.

Specific items of equipment for the proposed plant listed in Table 3 may have
useful lives that vary considerably from the 10 years assumed for the annual use cost
calculation. However, trying to estimate separately the useful life of each machine or
item in Table 3 would add little to the precision of the cost estimate, since fixed costs
make up only about 21-22% of total annual costs. Thus the 10-year estimated useful life
for all equipment is a reasonable assumption that simplifies considerably the calculation

of annual use cost.

60

The annual use cost technique is used to determine annual costs of fixed assets.
The calculation method yields an annual factor cost equal to an annual payment on a
regular annuity, accounting for the tax shield from the stream of depreciation and the
salvage value at the end of the durable assets’ useful lives. A five-step procedure

achieves this result.

A Five-Step Procedure for Calculating Annual Ownership Cost of Equipment
An example of the calculation of annual ownership cost of durable equipment is
shown below. The example applies to the Total Value of Equipment ($1,163,600), which
appears in column 5 of Table 2 (page 77). The calculations were made with a Lotus
1-2-3 electronic spreadsheet. Table 2a (page 80) takes the Total Value of Equipment
figure from Table 2 and applies the calculation method described here. In the example
below, in each case where the result of a calculation is shown, the column in Table 2a in

which that number appears is indicated in parentheses. The steps are as follows:

STEP 1. Determine the Present Worth of an Annuity for the appropriate time period
and cost of capital. The calculation shown below relates to processing plant equipment,
which has an estimated useful life of 10 years; the cost of capital is 9%. There are
equivalent terms for PWA in various finance textbooks; another commonly used term is
the Present Value of a Uniform Series. In most financial tables the PWA is expressed
as a figure that is equal to the present value of $1.00 received annually at the end of
each year for a given number of years (in this study the number of years is the estimated
useful life of the fixed asset). The PWA is the figure by which the Factor Cost should
be an ideg to calculate the annuity, or annualized cost.

(PWA, 10 Years, 9%) = 6.4177 (col. 10, Table 2a)

STEP 2. Determine the present value of the factor investment (which in this example
is the equipment for the proposed plant). This equals the purchase price of $1,163,600
(f.o.b. manufacturer) plus the estimated 12% additional cost attributable to delivery,
installation and engineering. The result is termed Factor Cost.

$1,163,600 (col. 1) x 1.12 = $1,303,232 (col. 2) = Factor Cost

61

STEP 3. Determine the present value of the tax shield from the stream of
depreciation. The factors in the calculation are:

Total Depreciation Over the X The Marginal X PWA = PV of Tax
Estimated Useful Life of the Input Tax Rate Shield

Steps a) through d) achieve this result:
a) Salvage Value = $1,303,232 X 10% = $130,323 (col. 3)

b) Total Depreciation Over Life of the Input
= Factor Cost - Salvage Value = $1,303,232 - $130,323 = $1,172,909 (col. 4)

c) Annual Depreciation = Total Depreciation + Input life = $1,172,909 + 10 =
$117,291 (col. 8)

(1) Annual Depreciation X Marginal Tax Rate X PWA = PV of tax shield
= $117,291 X 0.34 X 6.4177 = $255,929 (col. 11)
STEP 4. Determine the present value of the salvage value:
Salvage Value Received at X Present Value of $1.00 = PV of Sal-

End of Input’s Life Received in Salvage Year vage Value
(9%, Year 10)

$130,323 X 0.4224 = $55,050 (col. 7)
STEP 5. Determine the annualized cost of the durable capital asset, which equals the

algebraic, present value sum of the above three factors:

ctorC st - V sield + PV v V
Present Worth of an Annuity

= [2 - (3 + 4)] -:- PWA = Annualized Cost of Capital Asset

= [$1,303,232 - ($55,050 + $255,929)] -1- 6.4177 = $154,613 (col. 13)

This figure of $154,613 is the Annualized Value of Equipment, which appears in

the final column (column 13) of Table 2a. The Annualized Value of Equipment cost

62

figure also appears near the bottom of Table 2; the cost of insurance and tax are added
to give the Total Annual Cost of Equipment which is $163,340.

The annualized cost of the building and sewage treatment facility (excluding
land cost) appears in column 7 of Table 3 (page 79) and totals $118,679. That figure was
calculated using the same method described in this section, but with a PWA factor of 9%

for 25 years (9.8226, column 10), due to the estimated 25 year useful life of the buildings.

Input Cost Items in Tables 1-5
As mentioned above, Tables 2, 3 and 4 summarize the fixed costs and Table 1 the
variable costs. What follows is a description of the cost-producing inputs from these
tables and the different types of economic costs associated with each of them. Actual

calculations are shown where appropriate.

TablelLlrlnuthms

An important factor that relates to a number of the input items in this chapter is
the number of hours worked per year. That factor is used in several calculations in
addition to direct labor wages: chemicals, forklift fuel, water, and sewage disposal
services. The number of hours worked per year is calculated by assuming a 16-hour day
(two shifts), a 5-day work week, and with various assumptions on the number of weeks
per year. The calculation below assumes 8 month operation:

16 hours/day X 5 days/week X 36 weeks/year = 2880 hours per year

W- Determination of the labor required to run the plant was based on
the equipment distributor’s estimate of the number of workers required to operate the

various pieces of equipment. These original estimates were supplemented and adjusted

63

after checking with several processing plant managers. This category includes all of the
direct labor (directly associated with particular stages in the production process); the
indirect and supervisory labor is accounted for in Table 4. Every category of worker
except the clean-up crew is assumed to have two shifts. Since the number of workers
that appear in the table are the number of workers per shift, the actual number of
workers per day is 25 X 2 = 50 workers plus 6 clean-up for a total of 56 workers.
Assuming a $7.50 per hour wage, the annual labor cost for yard workers is calculated as
follows:

2 Yard Workers X 2880 hours/year X $7.50/hour = $43,200/year (col. 7)

Materials. By far the most important item in this category is the cost of the
retort pouch material, referred to as the laminate or roll stock. Other costs include the
corrugate for the shipping carton, chemicals (the potato whitening agent and other
chemicals for cleaning) forklift fuel, pallet stretch wrap (plastic material to wrap around
the cartons on pallets to stabilize them) and bobcat fuel (the bobcat is used in the yard
in the unloading of raw potatoes from the delivery truck).

1) The Lagging; costs $1.10 per 1000 square inches for the upper web. As
discussed in Chapter 3, the type of retort pouch used on the horizontal form/fill/seal
machine requires a heavier gauge lower web, and this additional strength is reflected in
a higher cost: $1.70 per 1000 square inches. The pouch size is 10.5" wide by 15" long;
these are the dimensions of the upper web. The lower web is drawn into a cavity with
a depth of about 1.4". Therefore about 1.5” should be added to the dimensions of the
lower web to account for this extra surface area; the dimensions of the lower web are

thus estimated to be 12" X 16.5".

64
Lower Web: 10.5” X 15" = 157.5 square inches per pouch

157.5 sq. in./pouch X $1.10/1000 sq. in. = $0.173/pouch
Upper Web: 12" X 16.5” = 198.0 square inches per pouch
198.0 sq. in./pouch X $1.70/1000 sq. in. = $0.337/pouch

Total Laminate Cost per Pouch = $0.173 + $0.337 = 32,51

The number of workdays per year is 5 days/week X 52 weeks = 260 days
The number of pouches produced per 16 hour day is 8640 (see App. A, page 113)
The number of pouches produced per year is therefore:

8640 pouches/day X 180 days = 1,555,200 pouches/year (col. 3)

Annual cost of laminate is: 1,555,200 pouches X $0.51/pouch = $793,152 (col. 7)

2) The unit price for the mg; is $0.90 per shipping carton, each of which is
assumed to hold 6 pouches. This cost is higher than that required for shipping cans
(around $0.50 per carton). The pouches require stronger corrugate for greater
protection. The annual corrugate cost is:

1,555,200 pouches + 6 pouches per carton = 259,200 cartons (col. 3)
259,200 cartons X $0.90/carton = $233,280 (col. 7)

3) Pang; stlgetcn map. A plant manager indicated in an interview that a
reasonable cost estimate would be about $35 per case. One case covers approximately
585 pallets. Eight months of operation per year would mean 2880 hours, producing
1,555, 200 pouches.

585 pallets X 16 cartons/pallet = 9360 cartons (with 6 pouches each)

1,555,200 pouches per year / 9360 (cartons per case) = 28 cases per year

(28 cases per year) X ($35 per case) = $969 (col. 7)

65
4) W. The plant is assumed to operate with a single propane powered

forklift. The first step is to estimate the fuel cost per hour of operation of the forklift.
The factor used in the Allison study was adopted for this project; that study assumed
that a forklift ran 8 hours on a tank. Since the fuel costs about $8 per tank, the fuel
cost is estimated at $1.00 per hour. The cost calculation is thus:

Annual cost of forklift fuel = 2880 hours/year X $1.00 = $2880 (col. 7)

5) MI. The bobcat is estimated to consume about a gallon per hour of
operation in the yard, unloading the raw potatoes. Delivery of the raw product is
assumed to occur only during one shift, so the hours are one half of the yearly total, or
1440.

6) Ema (for boiler). A rate per hour of fuel oil was adapted from fuel use
figures from a study on costs of a vegetable canning plant. The calculation to arrive at
the hourly cost figure is explained in Appendix D on page 117.

7) Chgrnicals. One input cost for which no adequate estimate could be found
was for chemicals - cleaning solutions and the whitening agent for potatoes (sulfites).

No figures for those items are therefore included in the cost estimate.

M. Utilities include water, sewage disposal services, and electricity for
heats, light, and running the equipment. Estimates of annual water usage and sewage
disposal were determined in consultation with an engineer with experience in food
plant waste disposal. Electricity use was determined to be proportional to that of a
vegetable canning plant (see Appendix C on page 116). Rates were obtained from local
utility companies. That information was used to calculate an estimated cost EST—Ml: of

operation for water and sewage. The details of how those factors were calculated are in

66
Appendix B at the end of this chapter. An example of the calculation of the annual

water cost is shown below:

Annual water cost = 2880 hours X $23.84/hour = $68,659 (col. 7)

mm. A portion of the building and maintenance costs

and all of the machinery costs are assumed to be variable costs. For buildings, the
variable maintenance cost is estimated at $0.40 per square foot per year.

20350 sq. ft. X $0.40 per sq. ft. = $8140 (col. 7)

Variable machinery maintenance cost is estimated as follows with a factor of 0.6

for complex machines and 0.3 for simple machines:

(Base Cost) X (0.3 to 0.6) = Repair Cost (over life of equipment)
The midpoint in this range (0.45) was selected as the appropriate factor to multiply times
the total value of equipment in the model plant. To estimate the cost per hour of plant
operation, the following calculation was made:

{[(Total Equipment Cost) X 0.45] -:- (Machinery Life)} + Maximum Hrs per Year
= Machinery maintenance cost per hour of operation

= {[$1,163,600 X 0.45] -:- 10 years} -I- 4160 hrs per year = $12.59 per hour (col. 7)

Willa]. Operating capital is the amount of money borrowed to cover
the expenses of operation. The costs are the interest payments made over the length of
the loan. A cost study of vegetable processing plants indicated that it is common
practice to borrow enough to cover all of the operating (variable) expenses, and that is

the assumption made in this calculation. The length of the loan repayment is assumed to

67

equal the maximum possible period of operation, which is 12 months. A typical
borrowing rate of 10% per year is assumed.
Amount of Operating Loan = Total Operating Expenses = $2,135,044
Interest Expense on Operating Loan = Amount of Loan X Interest Rate

= $2,135,044 X 0.12 = $256,205 (col. 7)

W

The long list of items of equipment that make up this table are depreciable
capital assets and the economic costs are the capital costs and depreciation. The sample
calculation earlier in this chapter show how the annualized cost of equipment is
determined. The annual personal property tax is based on an assessed value of 50% of
the original purchase price of the equipment and is calculated in the same manner as for
the building, as explained in the following section. Insurance costs are calculated in a

manner identical to the following section.

W

Land. Land is a non-depreciable capital asset and the economic cost of the land
on which to build the processing plant is the cost of invested capital (assuming neither
capital gains nor losses on the ultimate disposition of the land). An average price per
acre was assumed to be the cost of zoned industrial land near one of the
potato-producing areas in Michigan. The $30,000 per acre cost is the average estimate

from various real estate brokers for parcels of land under 10 acres for industrial use in

68

much of the Midwest.3 The annual ownership cost of land is the opportunity cost of
capital which could be invested in an alternative investment; a Treasury Bond yielding
9% is designated as the alternative investment. The total square footage of the model
plant is estimated at 20,350 square feet and the total land area requirements are
estimated at approximately four times the plant area itself (four times 20,350 square feet
is approximately 2 acres). The land is assumed to border roadways and utility hookups
are readily available. Thus no expense for roadwork or extending electric and water
lines is assumed.
Number of acres X Cost per Acre X Cost of Capital

2 acres X $30,000/acre X 0.09 = $5400 (col. 7)

Sige flgnazation. The cost of preparing the land for building is estimated at
$28,000 per acre.4 The annual costs of site preparation were calculated via the same
method used for the annual land input cost.

Mags. The building that will house the processing facility is assumed to be a
single structure divided into a number of sections, including processing area, storage
areas, and office space. The building is a durable capital asset subject to capital costs
and depreciation. The surface area (in square feet) of each of the sections and the cost
per square foot were approximations based on interviews with several canning plant

managers and with an engineer5 with a consulting firm specializing in food processing

 

3Daniel Surfus, engineer from Mead and Hunt, Inc. (consulting engineers), Madison,
Wisconsin. Personal communication.

4Surfus.
5Surfus.

69

plant design. The costs were assumed to include all fixtures and piping. The useful life
of the building was assumed to be 25 years with a 10% salvage value at the end of the
useful life. The pumps, screens and related equipment for the sewage treatment system
(assuming processing wastes are fed into a municipal wastewater treatment system) were
assumed to be $50,000; that figure was annualized in the same manner as the building
costs. Shown below is a cost calculation for one part of the plant:

Processing Area: (7,000 sq. ft.) X ($72/sq. ft.) = $504,000 (col. 5)

Ea' ed Bun' da’ g Maa’ tenangg Cost. Fixed annual repair and maintenance costs

6 These maintenance costs would

were estimated at $0.20 per square foot of structure.
be incurred whether or not the plant was operating.

20,350 sq. ft. x $0.20/sq. ft. = $4,070 (col. 7)

W. Property taxes are based on the assessed value of land and
buildings. Interviews with farm management specialists at Michigan State University
were carried out to ascertain an appropriate relationship of the assessed value of land
and buildings to their market value. The assessed value was determined to be 50% of
the purchase price of the land and buildings. A representative annual millage rate of $45
per $1000 was determined (which appears below as the factor 0.045). The method for

calculating annual property taxes is as follows:

 

6Surfus.

70
Initial Investment in land and Buildings X 0.50 = Assessed Property Value

$1,394,800 x 0.50 = $697,400 (col. 3)

Property Tax = (Millage Rate per Year) X (Assessed Property Value)

= 0.045 X $697,400 = $31,383 (col. 7)

Ingram. An annual insurance cost was calculated by multiplying the rate times
the value of the building. Plant managers indicated that a premium of $5.00 per $1000
of property was a reasonable estimate; this estimate appears as the factor 0.005 below.

(Rate per Year) X (Value of Building) = 0.005 X $1,278,800 = $6,394 (col. 7)

T 1 ° I m

Adaa’ istgative Cosgs. The administrative costs are the annual salaries of the
general manager and plant manager, supervisory labor (foremen), and indirect labor
(not directly associated with the production process - office workers and the Quality
Control Supervisor). The labor that is directly associated with the production process
are accounted for in Table 1 as variable costs. Nonwage expenses such as social security,
unemployment insurance, and worker’s compensation were determined as a percentage
(30%) of the total salary cost and were gouped under the heading of fringe benefits.
Below is an example of the annual administrative cost calculation:

Salary of Foreman (Processing) X No. of Foremen = $20,000 X 2 = $40,000 (col. 5)

71
RESULTS OF THE COST ANALYSIS

This section is organized as follows. The method for determining cost per pouch
and per pound is explained, followed by five tables that summarize all costs. The
resulting cost per pound is then compared to the prices of competing potato products.
Due to the uncertainty regarding certain cost elements, this section closes with sensitivity
analysis that illustrates the impact on the total cost estimate of variation above and

below the "best estimate" or "baseline" cost figures.

Summary of Annual Costs

Tables 2 through 5 summarize all the fixed and variable costs of owning and
operating the retort pouch processing plant. Tables 2, 3, and 4 make up the fixed costs.
In the baseline case with the assumption of eight months of operation per year, the sum
of fixed costs from those three tables add up to about 21.6% of total annual costs. The
variable costs are summarized in Table 1 and make up 79.4% of total annual costs.
Most operating cost figures in Table 1 are expressed in a unit cost per hou; basis,
which simplifies the job of re-calculating costs under different scenarios of the duration
of plant operation per year. To estimate 8 months and 12 months of operation per
year, for example, only the hours of operation per year need be changed, and all costs
can easily be recalculated.

The key results are the cost per pouch and per pound. Cost per pouch is
obtained by dividing the total annual costs by the estimated number of pouches produced
per year. Pouches produced per day are estimated as shown in Appendix A (page 113).

8640 Pouches per Day X 180 Working Days per Year = 1,555,200 pouches per year

Total Annual Costs of $3,811,556 + 1,555,200 Pouches/Year = $1.94 = Cost per Pouch

72

Estimated unit cost of packaging potatoes in retort pouches is $1.94 per pouch not
including cost of potatoes or brokerage.

A W estimate for average weight of pouch contents is based on interviews
with executives from several retort pouch food manufacturing firms and an examination

7 However, since it

of retort pouch packages from a German food manufacturer.
cannot be precluded that the average pouch contents will vary by as much as one pound,
the implications of a one pound variation above and below six pounds are considered as
part of the sensitivity analysis.

The raw product cost estimate must account for the fact that on average potatoes
will lose approximately 45% of their weight as waste during processing; the 0.55 factor in
the denominator of the formula below represents the 55% of the original potato weight

remaining after processing. Costs per pound of the raw product is thus expressed 'a

e u s of ota e ' e f'n' uct, so that it can then be added to

 

7 The six pound per pouch estimate was based largely on comparing the dimensions
of the estimated pouch size for the model plant in this study with the dimensions of a
retort pouch containing 4 kilogams (8.8 pounds) of shredded potatoes obtained from
Ebbrecht, a German food manufacturing firm. The German pouch was packed very
tightly with shredded potatoes. The model plant desigi specifies that four different
product forms will be produced. The smaller dimensions of the pouch for the proposed
model plant, plus the smaller quantities of whole or sliggd nngatngs that could be
packaged relative to the 8.8 pounds of sngedded ngtatog, in the Ebbrecht package
indicate that six pounds is a reasonable estimate of the average weight of pouch
contents.

73
the processing cost calculated above. The average price for US #1 bulk potatoes in
Michigan has averaged 5.5¢ per pound in recent years.8
($0.055 per pound) + 0.55 = $0.10 per finished product pound of potato
= $0.60 for six pounds
The final figure needed for the unit cost estimate is the brokerage cost; plant
managers from several leading potato processing firms in Michigan indicated that 3% of
the above mentioned costs was a reasonable estimate:
3% X ($1.94 + $0.60) = $0.076 or approximately 8c brokerage cost
Using these cost figures, the unit cost per pouch of retort pouch potato product
is calculated as follows:
$1.94 Total annual cost per finished product pouch
+ 0.60 Cost of potatoes
4» 9,93 Brokerage cost
equals $2.62 Unit cost per pouch of RPP
Cost per pouch is divided by six to get the price per pound:
$2.62 + (6 lbs. per pouch) = 44¢

This figure, 44¢ per pound, is the key figure that emerges from this analysis; it is an

estimate of the break-even cost to produce the retort pouch product, following the

 

8If production continues beyond 8 months, Michigan storage potatoes will likely be
exhausted, and potatoes must be purchased out of state, costing several cents more per
pound. If for example, potatoes were purchased at $0.08 instead of $0.055 per pound,
then the price for those potatoes would be calculated in the same manner:
($0.08 per pound) + 0.55 = $0.145 per finished product pound

To calculate the cost of potatoes going into the pouch requires using a weighted average
of $0.10 for 8 months (69% of the year, indicated by the 0.69 factor) and $0.145 for 4
months:

[($0.08/pound x 0.69) + ($0.145/pound x 0.31)] x 6 lbs.
= $0.68 for six pounds.

74

assumptions made in the design of the model plant, and given that the pouch will be

desigled to hold 6 pounds of potatoes.

75

TABLE 1 - ESTIMATED ANNUAL OPERATING COSTS FOR A PROCESSING
PLANT FOR PACKAGING POTATOES IN RETORT POUCHES

 

 

 

Item Units No. Cost/ No. Cost/ Annual
Units Unit Hourg/ Hour Cost
Year (3lxl4l
(2 shifts) or
(3lX(5lX(6)
(l) (2) (3) (4) (5) (6) (7)
STAGE 1 - RECEIVE POTATOES
Yard Horker-Receiving each 2 2880 $7.50 $43,200
STAGE 2 - FOOD PREPARATION
Product Inspectors each 6 2880 $6.75 $116,640
Food Preparer each 2 2880 $7.50 $43,200
Portion Neigher each 1 2880 $7.00 $20.160
STAGE 3 - PRIMARY PACKAGING
Form/fill/seal Operator each 2 2880 $7.50 $43,200
Pouch Filler each 2 2880 $6.75 $38,880
STAGE 4 - THERMOPROCESSING
Rack Loader/Pouch Inspector each 2 2880 $6.75 $38,880
Retort Operator each 1 2880 $9.00 $25,920
Rack Unloader/Pch.lnspector each 2 2880 $6.75 $38,880
STAGE 5 - SECONDARY PACKAGING
Case Packer each 2 2880 $6.75 $38,880
STAGE 6 - PALLETIZE AND STORE
Pallet Stacker/Forklift each 1 2880 $7.00 $20,160
Operator
OTHER DIRECT LABOR
General Maintenance each 2 2880 $9.00 $51,840
Clean-up Crew (1 shift only) each 6 1440 $6.75 $58,320
Subtotal (net of fringe ben.) 31 $578,160
Fringe Benefits $173,448
(30% of annual pay)
Subtotal Labor Compensation $7 608

 

9Based on 8 hours/shift, 2 shifts/day, 5 day work week, 36 weeks of operation per
year. 36 weeks (8 months) is the approximate length of time that the proposed plant
would operate each year, because that is the time that the firm could be supplied with
Michigan potatoes. Beyond that time, the firm would need to purchase potatoes from

out of state, significantly raising the cost of potatoes.

'76

TABLE I - OPERATING COSTS (continued)

 

 

 

 

Item Units No. Cost/ No. Cost/ Annual
Units Unit Hours/ Hour Cost
Year (3lxi4)
(2 shifts) or
(3)X(5lX(6l
(1) (2) (3) (4) (5) (6) (7)
MATERIALS
Laminate-Roll Stock pouch 1555200 $0.51 $793,152
Corrugate (cartons) carton 259200 $0.90 $233,280
Forklift fuel hour 2880 $1 $2,880
Pallet Stretch Hrapper case 28 $35 $969
Bobcat Fuel hour 1440 $1 $1,440
Fuel Oil (for boiler) hour 2880 $24.00 $69,120
UTILITIES
Hater hour 2880 $23.84 $68,659
Sewage Disposal Services hour 2880 $48.87 $140,746
Electricity hour 2880 $10.00 $28.800
MAINTENANCE 8 REPAIRS
Buildings sqft 20350 $0.40 $8,140
Machinery hour 2880 $12.59 $36,251
Subtotal (non-labor costs) $1,383,437
Subtotal (labor + non-labor) $2,135,045
OPERATING CAPITAL $ 2135044 0.12 $256.205
GRAND TOTAL 33.391.250

 

Sources: Unpublished data. Hage rates obtained from Michigan-based food process-
ing plant managers. See page 62 for assumptions and calculations for deriving
cost figures.

‘77

TABLE 2 - ESTIMATED INITIAL INVESTMENT REQUIREMENTS AND ANNUAL
OHNERSHIP COSTS: EQUIPMENT FOR A RETORT POUCH PLANT

FOR PACKAGING POTATOES

 

 

Item Unit No. Cost/ Initial Annual
Units Unit Investment Cost
(4)X(5)
(l) (2) (3) (4) (5) (6)
STAGE l-RECEIVE POTATOES
Feed Hopper ea. 1 $16,000 $16,000
Bobcat ea. 1 $9,000 $9,000
Inclined Conveyor ea. 1 $20,000 $20,000
Hater Bath Destoner ea. 1 $8,000 $8,000
Grader Reel ea. 1 $10,000 $10,000
Storage Hoppers ea. 3 $50,000 $150,000
Take-away Conveyor ea. 1 $7,000 $7,000
STAGE Z-FOOD PREPARATION
Hydro-lift/Destoner ea. 1 $13,000 $13,000
Brush Hasher ea. 1 $27,000 $27,000
Preheater ea. 1 $18,000 $18,000
Elevating Conveyor ea. 1 $11,500 $11,500
Steam Peeler ea. 1 $40,000 $40,000
Discharge Auger ea. 1 $13,000 $13,000
Abrasive Roll Scrubber ea. 1 $27,000 $27,000
Haste Auger ea. 1 $4,000 $4,000
Sludge Pump ea. 1 $1,500 $1,500
Hydro-pump ea. 1 $15,000 $15,000
Inspection Table ea. 1 $15,000 $15,000
Slicing Unit ea. 1 $35,000 $35,000
Surge Tank ea. 1 $15,000 $15,000
Solids Filler ea. 1 $2,000 $2,000
Cups ea. 500 $1 $500
Mixing Vats ea. 5 $200 $1,000
Cup Hashing Machine ea. 1 $1,000 $1,000
Stage 3-PRIMARY PACKAGING
Form/Fill/Seal ea. 1 $154,000 $154,000
Vacuum Pump ea. 1 $5,800 $5,800
Brine Filler ea. 1 $3,000 $3,000
Pouch Coder ea. 1 $20,000 $20,000
Checkweigher ea. 1 $3,000 $3,000

78

TABLE 2 - EQUIPMENT (continued)

 

 

 

Item Unit No. Cost/ Initial Annual

Units Unit Investment Cost
(4)X(5)
(1) (Z) (3) (4) (5) (6)

STAGE 4- THERMOPROCESSING

Pouch Racking Table ea. 1 $500 $500

Pouch Racks ea. 400 $90 $36,000

Retorts ea. 2 $122,000 $244,000

Data Logger (computer) ea. I $6,000 $6,000

Pouch De-Racking Table ea. 1 $500 $500

Pouch Dryer ea. 1 $40,000 $40,000

Lift Station ea. 1 $17,000 $17,000

STAGE S-SECONDARY PACKAGING

Pack-off Table (48") ea. 1 $4,800 $4,800

Taping Machine ea. 1 $9,000 $9,000

STAGE 6-PALLETIZE.STORE

Pallets ea. 50 $10 $500

Forklifts ea. $12,000 $12,000

GENERAL EQUIPMENT

Sewage Treatment Equip. ea. 1 $10,000 $10,000

Air Compressor ea. 1 $6,000 $6,000

Boiler ea. 2 $28,000 $56,000

Refrigerator ea. 1 $21,000 $21,000

Laboratory Equipment ea. 1 $5,000 $5,000

Conveyors(entire plant) set 1 $50,000 $50,000

Total Value of Eqpt. 10 $1,163,600

Annualized Value of Eqpt. $154,613

Insurance $ 1163600 0.005 $5,818

Personal Property Tax $ 581800 0.005 $2,909

(assessed at 50% of value)

Total Annual Cost $163,340

 

Source: Unpublished data. All costs are "ballpark" price estimates.
Price of retorts from Stock America, Inc. Price of form/fill/seal

machine from Koch, Inc.

 

10Calculation of Annualized Value of Equipment (annual use cost), accounts for
capital costs depreciation, tax effects of depreciation, and for estimated salvage value at
the end of durable assets’ useful life. This cost figure comes from column 13 in Table 2a

Other machinery prices from BFM, Inc.

(page 80), which shows how the calculation is carried out.
report for details on the calculation.

See also page 60 of this

79

TABLE 3 ' ESTIMATED INITIAL INVESTMENT REQUIREMENTS AND ANNUAL
OHNERSHIP COST FOR A RETORT POUCH PLANT FOR PACKAGING POTATOES:
LAND. BUILDING. AND SEHAGE

 

 

 

Item Unit No. Cost/ Initial Annuali- Annual—
Units Unit Invstmt. zation ized
(3)X(4) Factor Cost
(1) (2) (3) (4) (5) (6) (7)
Land acre 2 $30,000 $60,000 0.09 $5,400
Site Preparation acre 2 $28,000 $56,000 0.09 $5,040
Building
Processing Area
Sanitary sqft 7000 $72 $504,000
Other sqft 3000 $44 $132,000
Refrigerated Storage sqft 450 $50 $22,500
Laboratory Area sqft 900 $85 $76,500
Dry Storage Area sqft 5000 $44 $220,000
Boiler/Maint.]Elec. sqft 2000 $43 $86,000
Office sqft 600 $103 $61,800
Lunch 8 Locker Room sqft 1400 $90 $126,000
Total square feet sqft 20350
Sewage Treatment Plant plnt 1 $50,000 $50,000
from>
Total Value (excl. land) $ $1,278,800 Tablet1 $118,679
3a
Total Value (incl. land) $ $1,394,800
Fixed Bldg. Maint. Cost sqft 20350 $0.20 $4.070
Property Tax (bldg,land $ 697400 0.045 $31,383
assessed at 50% of value)
Insurance $ 1278800 0.005 $6,394
Total Annual Cost $170,966

 

Source: unpublished data. Square footage and land value estimates from Mead
and Hunt, Inc. (consulting engineers), Madison, Hisconsin. See page 67 for
assumptions and calculations for deriving cost figures.

 

11Calculation of Annualized Cost of Building (annual use cost), accounts for capital
costs depreciation, tax effects of depreciation, and estimated salvage value at end of
durable assets’ useful life. This cost figure comes from column 13 in Table 3a (page 80),
which show how the calculation is carried out. See also page 60 for details on the
calculation.

81)

 

 

 

 

 

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81

TABLE 4 - ESTIMATED ANNUAL ADMINISTRATIVE COSTS FOR A PROCESSING
PLANT FOR PACKAGING POTATOES IN RETORT POUCHES

 

 

 

 

Item Units No. Cost/ Annual
Units Unit Cost
(4)X(5)

(1) (2) (3) (4) (5)
General Manager each 1 $45,000 $45,000
Plant Manager each 1 $35,000 $35,000
Office Horker each 2 $20,000 $40,000
Quality Control Supervisor each 1 $20,000 $20,000
Foreman - Receiving each 1 $20,000 $20,000
Foreman - Processing each 2 $20,000 $40,000
Foreman - Hhse/Shipping each 1 $20,000 $20,000
Subtotal (net of fringe ben.) $220,000
Fringe benefits (30% of annual pay) $66,000
TOTAL $286.000

 

Source: Interviews with Michigan food processing plant managers.

TABLE 5 - ESTIMATED ANNUAL COST SUMMARY FOR A
RETORT POUCH PLANT FOR PROCESSING POTATOES

 

 

 

Item Cost Percent

of

Total
Operating (Variable) Cost $2,391,250 79.4%
Ownership Cost-Equipment $163,340 5.4%
Ownership Cost—Land, Bldg $170,966 5.7%
Administrative Cost $286,000 9.5%
TOTAL $3,011,556 100.0%

 

Source: Tables 1 through 4.

82
Comparisons With Competing Potato Products

A key conclusion derived from this research is that retort pouch potato products
would need to command higher prices than those of several traditional competing
products. Table 1 shows that at a cost of 44¢ per pound (for a 6-pound pouch) the new
retort pouch potato product would be at a price disadvantage relative to several
competing products. Note that 44¢ per pound is the estimated break-even cost of
producing retort pouch potatoes. Sales costs, other than brokerage, as well as profit and
marketing margins were not included in the cost calculation. Thus if the product is
manufactured and sold, the selling price would need to be even higher than 44¢. In
contrast, wholesale market prices are quoted for a number of competing potato products.
If the estimated cost of retort pouch potatoes is higher or only slightly below the market
prices of competing products, this is evidence that the retort pouch product is at a price
disadvantage.

In Table 6, the 44¢ manufacturing cost of retort pouch potatoes is, with one
exception, about the same as the lower range of wholesaler list prices. Wholesale prices
for "fresh-processed" or "peelers" (fresh potatoes delivered peeled and ready to use),
range from 45¢ to 57¢. However, it appears likely that the price of retort pouch potato
products, including promotion and advertising expenses, would likely be above wholesaler
prices for ”fresh-processed" and frozen potatoes. When further necessary allowances are
made for manufacturing profit margins as well as wholesaler margins, the price situation
becomes even more disadvantageous. Thus, it appears unlikely that retort pouch

potatoes could gain customer acceptance based on price considerations alone.

83

TABLE 6 - COMPARISON OF RETORT POUCH POTATO PRODUCT MANUFACTURING
COSTS AND NHOLESALER PRICES FOR COMPETING PRODUCTS

 

 

PRODUCT COST/PRICE1
PER LB.
1. Retort pouch potatoes 44¢ Cost
2. Fresh-processed 45-57t Market prices
3. Frozen, various products 43-54t Market prices
4. Frozen hash browns 50-67t Market prices
5. Canned - sliced/diced 44-45¢ Market prices

 

1.Hholesale market prices from survey of facd service operations
in Lansing, Michigan.

Sensitivity Analysis

The figures in Tables 1 through 5 summarize the best estimates of numerous
cost elements. In this section of the analysis, these figures are termed the Baseline

Scenario. Higher and lower estimates are calculated around these base figures.
Sensitivity analysis focuses on cost elements that are both uncertain and also large

enough that a change in the estimate would alter substantially the final cost calculation.
Table 5 sums the cost estimates from Tables 1 through 4. Operating Costs
(Table 1) make up 79.4% of the total cost of the final product. Examination of Table 1
reveals that the largest cost figures in that table are (1) labor and (2) materials
(Specifically, laminate and packing cartons). These cost items are obvious candidates for
sensitivity analysis. Other figures about which there is some uncertainty appear in Table
4 - the salaries of managers and other permanent employees whose pay does not vary
directly with the level of operation (they are paid salaries, not on an hourly basis). The
sensitivity analysis proceeds by estimating the effect on total cost of changes in those
three categories of cost figures. The explanations that appear below Table 7 indicate the

magnitude of the estimated variability of those figures.

84

The results of the sensitivity analysis are presented in Table 7. Each figure
arrayed in that table represents the total annual cost per pound (excluding cost of
potatoes and brokerage). Three figures in Table 7 are distinguished by a box. The
baseline figure of $1.94 represents the best estimate of the cost of packaging potatoes,
calculated by the method on page 73. The highest and lowest cost estimates in Table 7
are also boxed to distinguish them. Those figures are $2.06 and $1.69. The figures
demonstrate that the assumption with the greatest impact on the total annual cost per
pound is the estimated number of pounds of potatoes in the pouch. For that reason, the
results are presented showing a range of figures between 5 and 7 pounds, which are
judged to be the likely lower and upper limits. Note that in Table 7, Total Annual Cost
per Pouch is the same for five, six, and seven pounds. The cost of production would of
course not be the same with differing quantities going into the pouches. However, the
cost is the same for all three weight levels because the one-pound range on either side of
the six-pound estimate represents a lack of certainty about average weight of pouch
contents, not alternative sizes to be produced by the plant.

Table 8 then takes the most likely scenario (8 months of annual operation,
Baseline Scenario) and compares those figures to the very highest and lowest total
annual cost per pound figures from Table 7. These three sets of total annual cost
figures (Baseline, Lowest Cost and Highest Cost) appear in column 3 of Table 8. Table
8 completes the cost calculations (for Baseline, Lowest Cost and Highest Cost), using the
formula for calculating unit cost given on page 73 at the end of the previous section.
The 6-pound baseline cost estimate is $2.62 per pouch or 44¢ per pound. Still
considering the Baseline Scenario, the figures indicate that cost per pound estimate can
vary by up to 6¢ above and below 44¢ if a 5 or 7-pound estimate of average pouch

contents is used.

85

Sensitivity analysis of the cost estimate in Tables 7 and 8 indicates that retort
pouch potatoes may be somewhat cost competitive with some products, but only if
certain conditions occur. Those conditions include being able to fit an average of 7
pounds of product in the pouch and being able to produce according to the ”Lowest
Cost" scenario as shown in Table 8. The "Lowest Cost Scenario involves operating 12
months per year (versus 8 in the baseline scenario). It also involves low estimates
relative to the baseline of several cost elements: salaries ($2500 less per year), wages
(50¢ less per hour), laminate cost (5¢ less than baseline cost of 51¢ per pouch) and
carton cost (10¢ less than baseline cost of 90¢). The basic conclusion reached in this
study, that retort pouch potato products are not likely to be cost competitive, is based on
the assumption that the baseline conditions are more likely to occur than the lowest cost
conditions and that the 44¢ per pound is the most likely cost estimate. If the "High
Cost" conditions occur, the price of retort pouch potato products will be even greater

relative to competing traditional products.

Reasons for the High Cost of Retort Pouch Processing

An important question to ask is: Why is the new product so expensive? One key
factor resulting in high cost estimates is that given present technology, horizontal-fill
retort pouch operations have a relatively slow line speed and are more labor-intensive
than other food processing methods, such as canning and freezing. The relatively high
labor requirement for pouch processing results from several points where pouches must
be manually handled. Also, every pouch must be visually inspected twice.

Materials are also relatively costly. The laminate for one pouch is estimated to

cost 51¢, a high proportion of total costs. That compares to a cost of 40-45¢ for a No. 10

(ML-3‘3

86

can. Additionally, shipping cartons are expensive relative to those for No. 10 cans
because pouch cartons must be considerably stronger to protect the pouches.

The high cost of packaging retort pouches raises the question of whether this
kind of pouch product, even with its positive attributes, can be sold in high enough
volumes at the higher prices required. The answer to this question is suggested by

interviews carried out as part of the market assessment discussed in the next chapter.

87’

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-coao mo no.»ocaa

TABLE

88

8 - BASELINE COSTS PER POUCH AND PER POUND OF PACKAGING
POTATOES IN INSTITUTIONAL SIZE RETORT POUCHES AND
COMPARISON TO HIGHEST AND LOWEST COST ALTERNATIVES

 

 

 

Cost Lbs. of Total Potato Broker- Total RPP Cost~

Scenario Potato Annual Cost(3) age Cost RPP Cost per

per Cost per (3%) per Pound(5)

Pouch(1) Pouch(2) Pouch(4)
HIGHEST 5 $2.06 $0.50 $0.08 $2.64 $0.53
COST 6 $2.06 $0.60 $0.08 $2.74 $0.46
7 $2.06 $0.70 $0.08 $2.84 $0.41
BASE- 5 $1.94 $0.50 $0.07 $2.51 $0.50
LINE 6 $1.94 $0.60 $0.08 $2.62 $0.44
7 $1.94 $0.70 $0.08 $2.72 $0.39
LOWEST 5 $1.69 $0.57 $0.07 $2.33 $0.47
COST 6 $1.69 $0.68 $0.07 $2.44 $0.41
7 $1.69 $0.80 $0.07 $2.56 $0.37

Source: Table 7 for Total Annual Cost per Pouch.

(1) Six pounds is most likely estimate of average weight of pouch
contents. However, a one-pound variation in average weight
cannot be precluded, so calculations are also made using five
and seven pound estimates. See page 84 for more details.

(2) Total Annual Cost per Pouch is the cost of packaging potatoes in
retort pouches, excluding the cost of potatoes and brokerage,
which appear in 'the following columns. The three' columns are
summed to equal RPP Cost per Pouch. Total Annual Cost does not
vary' with the estimated pounds of” pouch contents because the
l-pound range represents a lack of certainty about average weight
of pouch contents, not alternative sizes to be produced by the
p ant.

(3) Potato cost per pound is multiplied by pounds of potatoes per
pouch (column 2). Cost per pound in terms of finished product is
estimated at $0.10 for the eight months that Michigan pota-
toes are available and $0.145 for the remaining four months
when out of state potatoes would be purchased. Since LOWEST
COST scenario assumes 12 months of operation, potato cost is
a weighted average. See page 73 for details.

(4) Equals the sum of the previous three columns. RPP - retort
pouch potatoes.

(5) Equals RPP Cost per Pouch (in previous column) divided by
estimated average weight (in second column).

HIGHEST COST - 8 months operation per year; High Wage, Salary,

and Material Cost of Table 7.
BASELINE - 8 months operation per year; baseline scenario
LOWEST COST - 12 months operation per year; Low Wage, Salary,

and Material cost of Table 7.

CHAPTER 6: MARKET POTENTIAL ASSESSMENT

Acknowledging the fact that the pouch is a relatively expensive container for
potatoes, a key question to ask is: Are there attributes of the product which would still
make it attractive to the food service market? On balance, as indicated in the discussion
that follows, the answer appears to be no; there are insufficient attractive features of
retort pouch potatoes to induce widespread switching away from traditional potato
products in current use by food service operations.

Market potential for retort pouch potato products was assessed through
interviews with executives from leading Michigan institutional wholesalers and with
managers of food service operations in the Lansing, Michigan area. Each of these is

discussed in turn.

RETORT POUCH FOODS AND THE FOOD SERVICE MARKET

Retort pouch packaging of food products is not a new idea. Packaging foods in
large pouches was actively discussed in the 1970’s. As far back as 1972, a hospital
feeding study was undertaken in which the authors concluded that "...the institutional
sector does not require the extensive education required for entry into the consumer
market. Food service operators quickly perceive the advantages of pouched foods and
see future opportunities for modified foods, solid meat entrees, and breakfast foods."1
A representative of one of the retort pouch manufacturing firms wrote in 1982, "In a
typical food service operation, speed of preparation and efficient utilization of available

space are key concerns. The shelf stable bulk foods retort pouch will allow rapid

 

1Richard Abbott, ”Producing Retort Pouches to Suit Particular Needs,”
Food Sciences Institute, 45.

89

9O

preparation of high-quath foods, without the cost and space needed to refrigerate or
freeze food."2
A pouch manufacturer conducted a concept market survey in the late 1970’s to
study the retort pouch as a possible replacement for the #10 can. That firm found that
"end users” (food service operators) were willing to try the pouch; the main reasons cited
for wanting to find a substitute for the #10 can were safety and disposability. At the
time, their prediction was that pouched food products would command a premium due
to their better quality, and that the introduction of pouch technology was an opportunity
for the introduction of new food products.3
One source classified the #10 can market into 3 main segments and noted
possible opportunities for pouch packaging in each of them; those categories were ”hotfill
pumpables", ”high-acid particulates", and "low-acid particulates." In 1980 their figures
showed that three classes of products made up 78% of the 700 million #10 cans sold.
The three classes were tomato products (hotfill pumpables, with 32% of the market),
fruits in syrup ( high-acid, with 22% of the market), and vegetables (low-acid, with 24%
of the market). They estimated that pouched foods could make inroads into each of
those categories, and that additional foods with market potential included potatoes,

mushrooms, seafood, and entrees. They also expected some penetration into the frozen

food market.4

 

2David A. Heintz, "Marketing Opportunities for the Retort Pouch," Eggd
Wu. 38-

3Edmund G. Astolfi, "Market Opportunities for the Institutional Size Retort Pouch,"

Unpublished company report, American Can Company (Greenwich, Connecticut), 1 May
1981.

4Astolfi.

91

However, pouched foods have not made significant inroads except for tomato
products, and that has been on a limited scale. It should be noted that ketchup and
tomato paste packaged in pouches are not retort pouch foods, because the commercial
sterility of those products is achieved in the hotfill process; they do not have to be
retorted after filling. Only one firm is attempting to build a market for fruit slices in
institutional size retort pouches (Truitt Brothers, Salem, Oregon) and no firms are

selling vegetables in institutional size pouches.

THE INTERVIEWEES

The market survey portion of this research focused on two groups: a)
institutional wholesalers, and b) the end users (food service operators, who are the
customers of the wholesalers). Interviews were conducted with personnel from four
different institutional wholesale operations: Gordon Food Service (GFS), Kraft, Miesel,
and Evans. GFS is the largest operation in the regional market consisting of Michigan
and portions of surrounding states. There are numerous small food service wholesalers
and the .market share represented by these firms was not determined. However, Muggio
indicates that those four firms represent a large portion of the market for Michigan and
surrounding states and are among the more progressive firms (meaning that those firms
are more willing to introduce new products).5 Thus the consensus that emerges from
interviews with representatives of those firms provides a solid basis on which to draw
preliminary conclusions about the market potential.

Interviews were also conducted with people in several different kinds of food

service operations: eight family-style restaurants, one hospital, one nursing home, one

 

5Bari Muggio, Gordon Food Service, Grand Rapids, Michigan. Personal
communication.

92

golf course restaurant, one ”deli”, one catering company, two college food service
operations, and one food service company that runs a number of different food service
operations in schools as well as in business and industry. This cross-section of sixteen
operations provides a good representation of the different segments of the market to

which manufacturers of retort pouch potato products may have to appeal.

VIEWPOINTS OF INSTITUTIONAL WHOLESALERS ON MARKET PROSPECTS
The general view of the wholesaler personnel interviewed was that the critical element
for success of this new product is the ability of the new potato product firm to create
demand for this product on the part of the wholesalers’ customers. All of the
institutional wholesalers emphasize the need for a substantial promotion effort if a
market for retort pouch potato products is to be created. They contend that ”the product
will not sell itself." Two key limitations to widespread sales of RPP emerged from the
interviews. The first is the fact that there are numerous alternative potato products
currently on the market with which food service operators are generally satisfied; these
products will not easily be displaced. Inertia in displacing products in the wholesalers’
product lines is an additional hindrance to the succesful market introduction of retort
pouch potato products. Each of these two key limitations will be considered in turn.

There are numerous alternatives for institutional users of potato products:
frozen, dehydrated, canned, fresh, and ”fresh peeled”, also referred to as "fresh
processed” or "peelers." This last category consists of potatoes that are peeled and
placed in plastic tubs or bags, usually treated with a whitening agent (sulfites) and may
be sold in various weights; 30 pounds was a common weight. The potatoes may be whole
or cut. One wholesaler indicated that they had their own peeling and bagging operation;

the others contracted this out. Seven days was cited as the likely shelf life of the fresh

93

peeled potatoes, so deliveries to food service operations need to be frequent. However,
the wholesalers are able to organize their operations to make frequent deliveries of a
number of different perishable items, including ”peelers.” Since this system works
reasonably well, the shelf stability feature of retort pouch potatoes is not viewed as a
great advantage.

Shredded potatoes provide a good example of the competition that retort pouch
potatoes face. An important use for shredded potatoes in retort pouches would be to
make hash browns, but all of the wholesalers indicated that there is an effective
competitor already on the market. That product was referred to as "semi-cooked" hash
browns; though it requires refrigeration, it has an estimated 30-day shelf life and sales
have been quite good. There are other examples of potato products currently on the
market with which the proposed retort pouch potato product may have a tough time
competing.

The institutional wholesaler interviews also revealed that it is not easy to place
new food products into one of the thousands of "slots" from which their salesmen supply
their customers. Most sales calls on customers are of short duration and salespeople
typically devote very little time to introducing new products. If retort pouch potatoes
were to be sold by their firm, the product would have to prove to be more lucrative for
the salespeople and for the company than products that they are currently carrying. To
be more lucrative for the salespeople, the m of retort pouch food sales must exceed
that of some other product that they are currently carrying, or the margin that
salespeople earn on the new product must be substantially above the margin that they
are currently earning. It may be possible to convince them that the new potato product
should be in their line of products, but not without a substantial promotional effort.

Part of the promotional effort by the food manufacturer could be to engage in "pre-

94

selling” in which inducements to increase sales of a product come from subsidizing the
margin on the product earned by salespeople. Promotional expenses may add
substantially to the unit cost of the product, making it even less cost competitive. Large
scale promotions are generally undertaken by large food manufacturing firms, not new
pioneering food firms.

One of the wholesalers also noted that if retort pouch potato products were
successfully introduced, other existing potato products would be displaced. In response,
suppliers of these displaced products would likely retaliate with lower prices or increased
promotional efforts, which would in turn mean the retort pouch firm would have to fight
even harder to stay in the market. Any such effort would further add to the promotional
cost of launching the new potato product.

A Michigan firm began selling potatoes in retort pouches in 1974. One
institutional wholesaler indicated that a number of customers had been quite pleased
with the product, and that family-style restaurants in particular used the sliced potatoes
for American fries; diced potatoes also sold well. Several hospitals were good

6 That firm went out of business after only a few years. A contributing

customers.
factor to the firm’s demise was the tendency of the pouch material to delaminate. The
packaging process needed improvement.

Improvements in retort pouch technology have taken place, and a retort pouch
potato product developed today would have many fewer problems with the integrity of
the package. However, there have also been advances in the development of many

other potato product forms with which retort pouch potatoes would have to compete

(such as the semi-cooked hash browns mentioned above).

 

6Morrie Gabrielse, Gordon Food Service, Grand Rapids, Michigan. Personal
communication.

95

 

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96

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97
FOOD SERVICE BUYER ATTITUDES TOWARD RETORT POUCH POTATOES

One result of the ready availability of potatoes in numerous forms is that many
of the Lansing area restaurant managers that were interviewed expressed the idea that
they were in general satisfied with the potato products that they were using and saw no
compelling reason to switch to retort pouch potato products unless they were obviously
of superior quality to what they were using, or at least of comparable quality and with a
lower price. The cost analysis indicated that a firm selling potatoes would probably be
unable to sell them profitably at a lower price.

The frequency of responses to certain questions is indicated in Table 10.
Out of the 16 establishments visited, eight were restaurants and eight represented other
kinds of food services. Due to the busy schedules of food service managers, many of the
interviews were short in duration, leaving insufficient time to ask every question to each
person interviewed. In several cases, the respondent noted that they were content to
continue using the potato products they were currently using and thus answered few
other questions. This is the reason for the large number of non-responses in Table 10.
This indicates a lack of enthusiasm on the part of a number of food service managers for
the retort pouch concept, which does not bode well for the market prospects for retort
pouch potato products.

However, for those respondents that would consider using the retort pouch
potato product in their food service operation, sliced potatoes for use in making
American fries was preferred by four out the six that indicated that they may use the
product if it were available. The next most common response was shredded potatoes for
hash browns (mentioned by three). Three respondents suggested that they would
consider using diced potatoes (two of them for soup). Only one of the food service

operators indicated an interest in possibly using whole potatoes. Ten other food service

98

managers out of the sixteen interviewed said they would not be likely to use retort pouch

potatoes in their operation.

ATTRIBUTES OF RETORT POUCH POTATO PRODUCTS

The literature review turned up a number of attributes of retort pouch foods that
promoters of the pouch technology said would be the main selling points or advantages.
One of the main objectives of the interviews was to determine how these attributes are
viewed by potential purchasers of retort pouch potato products.

Dispgsabilig. The table indicates that there is little consensus on this issue.
Three of the food service managers indicate that the ease of disposal relative to #10
cans is an attractive feature of pouches, but two others do not. Several of them also
replied that they did not consider disposal to be a large problem because there are
always slack periods during the day during which they could assign their workers to the
task of smashing cans into a smaller size to make them more disposable. In addition,
most of the #10 cans that they handle are for products other than potatoes, so
elimination of canned potatoes alone would change little. Most of the other potato
products, such as frozen, fresh, or dehydrated have no more disposal problems than
would use of the pouched product.

W. The managers also generally agreed that cans do cause
occasional injuries to employees, but that this was not a significant problem in their
operations. Three agreed that pouches would be safer than cans, but just as with the
disposability factor, several managers remarked that even if they used retort pouch
potatoes, they would still be handling numerous other products in cans. This relates to a
theme that ran through several of the interviews: if there were already widespread use

of pouched foods, the addition of potatoes to the list might be welcome. However, since

99

their operations are currently tailored for using canned or frozen goods, they were not
interested in having to handle this one product somewhat differently.

Signage. Some of the wholesalers and food service operators echo another
theme noted in the literature review: that refrigerator and freezer space are typically in
short supply. The shelf stable aspect of the retort pouch potato product could thus be an
advantage. Four of the seven that responded to this question indicate that refrigerated
storage was indeed a problem. However, other food service people counter that a
number of establishments had taken care of this problem by building large amounts of
refrigerated storage and that for them, it is dry storage space that is cramped. One
nursing home operator notes that they are short of both kinds of space, but they resolved
that problem by maintaining low inventories. Due to the frequent deliveries from their
institutional wholesaler, this proves to be a satisfactory solution.7

A number of food service operations have also made substantial investments in
special shelving that facilitates the use of #10 cans. Though they may in principle see the
advantage of using pouched foods, they are likely to continue to use canned potatoes due
to their prior investment in their current method of storage.

One additional negative perception expressed by several respondents relates to
the likelihood that the pouched potatoes would have to remain in their original cartons
in their storage rooms. There are two reasons for this. First, the slippery surface of the
package may make it unsuitable for stacking on shelves once they are removed from the

cartons. A second problem is illustrated by the comments of one restaurant operator; he

noted that he likes his workers to be able to readily identify canned products and get

 

7Carol Sichterman, Health Care and Retirement Corporation, Grand Rapids,
Michigan. Personal communication.

100
them quickly from the shelf. While this is no problem for his canned goods, he foresees

difficulty in this regard for pouched products.

Echoing that concern, a nursing home food service manager says that another
aspect that could make the pouched food disadvantageous is that state health inspectors
sometimes require them to remove goods from cartons and stack them for easy visibility.
In distribution of pouched food products, reliance is likely to be placed on identifying the
product from the outside carton, not through labeling of the pouch material itself.

Handling. One theme that emerged from magazine articles reviewed for this
project was the view that retort pouch foods would fit easily into existing food service
operations (most of those articles were written in the late 19705). However, the
representatives of only one firm interviewed expressed agreement with this view. That
firm services a number of business and industry cafeterias. One of their managers
indicated that the pouched potato product might be easily placeable into steam tables on
serving lines.

A key issue in handling is the perceived strength of the package. The closest
comparison between retort pouch potatoes and products that food services are currently
handling are the "pouch packs" of ketchup and tomato paste; some of their customers
have ceased using pouches for ketchup because of leakage problems. Two of the
wholesalers interviewed noted that one of the main factors in their customers’ resistance
to using pouched foods is concern over leakage and breakage. The pouch is perceived
by some to be a weak container with possibly faulty seals. and three respondents have a
specific concern with possible leakage problems. One respondent also indicated concern
with the possibility that pinhole leaks may result in unsafe food.

Another concern is what to do with partially empty containers. A perceived

advantage of frozen foods is that the user can take just the quantity needed and leave

101
the remainder in the freezer; frozen foods thus lend themselves to W. A

partially empty can may be left out or in a refrigerator for at least part of a day before it
is either used up or transferred to another container. The contents of partially empty
pouches, on the other hand, would likely have to be transferred to another container
immediately, and this is viewed by three interviewees as a distinct, if rather minor,
disadvantage.

W. One conclusion drawn from the literature review for this
project is that institutional wholesalers might be quite concerned about difficulties in
handling pouched foods. A food service market survey undertaken by a pouch
manufacturer concluded that some of the key factors on which the success of retort
pouch foods might hinge are solutions to several technical problems related to
distribution and handling. Three problems mentioned are: 1) the lack of automatic
handling equipment for pouches, 2) the fact that pouches could not be stacked very high
in warehouses, and 3) the fact that the general susceptibility to abuse during shipping

8

was greater for pouches than for cans. Another survey quoted a distributor as saying,

"It is up to the manufacturer to provide the product wrapped in a case compatible with
our warehouse distribution system."9

The interviews in Michigan turned up only one case where the low stacking
heights of pouched foods was perceived to be a problem: a manager of the central food
service warehouse for Michigan State University indicated that space was at such a

premium that they were unlikely to handle pouched foods if they could not be stacked as

high as cans. In contrast, the institutional wholesalers acknowledged although that such

 

8Astolfi.

9Giannattasio, et al, 16.

102

products would be more difficult to handle, they would be able to accommodate them if
demand for pouched foods materialized. They are handling increasing quantities of
fragile products, and even today pallets are frequently placed on individual racks in their
warehouses. Gordon Food Service has the most positive outlook on the future of
pouched foods and has constructed a warehouse especially equipped to handle pouched
products.

Sulfiting of Potatoes. Peeled potatoes darken quickly upon exposure to air.
Although the darkening of the potatoes poses no particular health hazard to the typical
American consumer, whiteness is an important part of the visual appeal of potatoes.
Manufacturers and purveyors of potato products must therefore go to considerable
lengths to assure that their handling methods do not allow the potato to darken. This is
typically done by immersing peeled potatoes in a solution of sodium bisulfite, a chemical
whitening agent. The institutional wholesalers that handle the fresh-peeled potatoes
state that those potatoes have been treated with sulfites. The model plant design in this
study also calls for the potatoes to be immersed in sulfite after peeling, but before being
placed in the pouches. This is necessary given the present technology, because there is a
period of several minutes of exposure of the potatoes to the air before being placed in
the pouches.

Sulfites have recently come under the scrutiny of the Food and Drug
Administration (FDA) because of several cases of death and illness apparently caused by
allergic reactions on the part of certain people. The allergic reactions documented to
date have been caused by consumption of salads from salad bars where the sulfites had
been applied to the food items to maintain a fresh appearance. Though there have
apparently been no deaths attributed to industrial uses of sulfites (such as in institutional

sales of potatoes), industry observers note that restrictions on the use of sulfites will

103

remain an issue. The state of Michigan requires labeling in instances where sulfites are
used. The institutional wholesalers note that efforts are underway to find substitute
whitening agents, but no effective substitutes have yet been identified.

Hospitals in particular are concerned about avoiding sulfite-treated potatoes.
Their reasons have as much to do with the importance of sodium-controlled (low salt)
diets as with the concern over allergic reactions (the whitening agent is sodium bisulfite).
One wholesaler has responded by supplying hospitals with 2530 pound tubs of
fresh-peeled potatoes completely immersed in water to avoid darkening.

If the retort pouch facility could be designed to avoid the use of sulfites on the
potatoes, that could be a distinct advantage in appealing to certain segments of the food

service market. As yet, however, that does not appear to be possible.

OTHER FACTORS RELATED TO MARKET POTENTIAL

Another factor is that certain categories of the food service market are heavy
users of potato products, but are not using the product forms that retort pouch potato
products could readily replace. Two prime examples are nursing homes and schools.
Nursing homes serve large quantities of mashed potatoes, which are usually supplied to
them in granular form. Schools tend to use mainly frozen products, especially french
fries and "tater tots". Schools and some other publicly funded institutions such as medical
facilities are also recipients of large quantities of potato products from the USDA
commodity distribution programs; they are not likely to purchase retort pouch potato
products, especially if priced at a premium, which appears to be a necessity.

A number of restaurant operators like to maintain an image of using fresh
products and thus prefer to purchase raw potatoes or “peelers” for many of their menu

items. They are thus not likely to be purchasers of retort pouch potato products.

104

One category of restaurant to which it was initially assumed the retort pouch
potato product would appeal are ”Mom and Pop” restaurants and establishments that do
a large breakfast business. Hash browns are by far the most important product in this
regard, and that is one product that is definitely already available in various forms:
frozen, dried, and the relatively new ”semi-cooked" fresh version. Thus inroads into this

market niche may also be difficult.

CHAPTER 7: SUMMARY OF KEY FINDINGS AND
ASSESSMENT OF POTENTIAL SUCCESS

This study was undertaken in response to an expressed need from leaders in the
Michigan potato industry for expanded processing opportunities for potatoes. The
purpose was specifically to examine the feasibility of establishing a small scale
commercial plant to package potatoes in retort pouches. This study focused on
institutional size retort pouch potato products because the poor record of success in
consumer product sales and because food product innovations often find better initial
acceptance in foodservice operations than in retail sales direct to consumers. This
chapter summarizes key points from preceding chapters and draws conclusions about the
likely success of the proposed retort pouch potato product. The final section explains
limitations of the research and suggests extensions which could be the subject of future
research.

The research method employed a two-pronged approach. One part of the
research involved estimating the costs of establishing and operating the plant, and
expressing the costs in a form that could be used to compare the finished product cost to
prices of traditional, currently used potato products. The second aspect was to carry out
interviews to assess foodservice industry attitudes toward the proposed new potato
product. Summarizing the opinions of end users such as restaurant managers, and of the
institutional wholesalers that supply them, helped draw conclusions regarding the
probable success of the product in the marketplace. The two-pronged approach was
especially useful in that interview respondents could be told that the price of retort
pouch potatoes would likely not be lower than the price of competing potato products

that they were currently using. With this knowledge, respondents could make

105

106

judgments about whether there were other advantages to using retort pouch potatoes to

justify use to that product in their operations.

TECHNICAL CHALLENGES IN ESTABLISHING AND OPERATING THE PLANT
Since retort pouch technology is neither currently in use in Michigan, nor widely
used nationwide, a key objective of the study is to familiarize potential decision makers
with the key issues surrounding possible adoption of this food packaging innovation.
Considerable technical expertise is required in making the technological choices required
in designing the plant largely because there is a very limited track record of firms
processing institutional size pouches. Consequently, little knowledge is available to draw
on except that of packaging small size pouches. As described in Chapter 3 (page 14),
choosing the type of pouch construction and filling method (vertical or horizontal)
involves one set of choices. In addition, meeting federal government requirements for
sterilization and other aspects of establishing the plant (some of which are detailed in
Appendix G, page 121) also pose substantial challenges due to the pioneering nature of

this processing method.

SUMMARY OF MARKET PROSPECTS
The historical record indicates that the commercial success of retort pouch foods
has fallen far below expectations. Major reasons for this include higher costs associated
with packaging, processing, and handling as well as lack of familiarity among potential
users. The technology is not new; retort pouch products have been available for
commercial use for over a decade. Most of the firms currently manufacturing retort
pouch foods sell primarily to the US. armed forces. Retail sales are limited to specialty

niches such as recreational markets. Early expectations were that institutional pouches

107

might displace No. 10 cans of vegetables in the food service market, but this has not yet
happened. Only one product (fruit slices) currently is processed and sold in the United
States in institutional size retort pouches. Thus a major obstacle to succesful
development of retort pouch potato products is that such an undertaking involves
entering relatively uncharted territory, in which entrants have not had significant success
to date.

Major factors in the negative market outlet for retort pouch potatoes are the
current availability of competing potato products to meet food service operators’ needs
and the high cost of packaging potatoes in retort pouches. Among the likely
contributing factors to the high cost of retort pouch processing are high labor input, slow
line speeds, and high cost of materials.

Executives from four Michigan-based institutional wholesalers were interviewed;
the four firms surveyed represent a large portion of the market for Michigan and
surrounding states. They emphasized the need for a substantial promotion effort to
stimulate sales and that the product will not sell itself, largely because there are
numerous competing potato products currently on the market with which food service
operators are generally satisfied. They also stressed that existing products will not easily
be displaced. Inertia in displacing products in the wholesalers’ product lines is an
additional hindrance to the succesful market introduction of retort pouch potato
products. There are a limited number of warehouse slots and items carried by
wholesalers. Furthermore, executives interviewed indicated that their salespeople tend to
concentrate on selling high volume current products, devoting little time to introducing
new products.

Table 6 (page 83) provides information suggesting that retort pouch potatoes may

need to be sold for higher prices than most competing products. Since retort pouch

108

potatoes are relatively expensive, restaurant managers and other food service managers
were interviewed to determine if there were positive product attributes that would induce
the operators to purchase them despite the likelihood of higher prices. Six out of sixteen
food service managers interviewed indicated some interest in trying the product if it was
available. The remaining ten managers expressed little or no interest in the product and
were satisfied with the potato products they were currently using.

Certain attributes that were initially considered to be major selling points of the
product appear not to be important issues with the majority of the food service operators
interviewed. Some of the key attributes on which the idea of retort pouch foods have
been promoted in the past are shelf stability (needs no refrigeration) and ease of
handling and disposability relative to cans. These attributes were not considered
sufficiently important by a majority of respondents to induce them to purchase the
product. Some disputed whether pouches are really easier to handle, and others argued
that even if there are advantages relative to cans, they would be realized only if there
were numerous pouch feeds available in institutional packages and they could switch
away from buying many products in cans. Out of the numerous products handled in
their food service operations, changing only potatoes from cans to pouches was not
considered to be a great advantage. Handling potatoes in pouches with different
methods than other foods could be viewed as a nuisance. Also, many potato products
are in frozen or powdered form, and retort pouch potatoes have fewer handling
advantages relative to those two products. Thus, at least in the case of potato products,
certain features of retort pouch foods are not as attractive to potential buyers as retort
pouch promoters have suggested.

Some food service managers did agree that the fact that retort pouch potatoes

would not have to be frozen or refrigerated was an attractive feature, but for others,

109

frozen and refrigerated storage was not so significant a problem in their operation that
they viewed switching to retort pouch potatoes as a particular advantage.

Several interviewees also expressed concern about leakage and breakage of
pouched foods in general and that retort pouch potatoes may be subject to the same
problem. Storage of unused contents of a pouch once it has been opened was another
perceived problem.

Restaurants emphasizing fresh products are not likely to be attracted to retort
pouch potatoes for use with their menu items. Schools and medical facilities receive
large USDA commodity donations and are thus unlikely to purchase retort pouch
potatoes, especially if priced at a premium.

Costly promotional efforts would likely be necessary for succesful market
introduction of retort pouch potato products. A small-scale pioneering food firm is
likely to find this is quite difficult relative to the promotional capabilities of large scale
food manufacturing firms whose products the retort pouch potato firm would try to
displace.

In summary, the food service market potential assessment indicates that few
positive considerations are present that would help overcome the likely price

disadvantage of retort pouch potato products.

CONCLUSIONS AND IMPLICATIONS
Packaging potatoes in institutional size retort pouches was investigated as a
possible market outlet for Michigan potatoes. Unit costs of retort pouch potato products
were estimated and market potential in the food service industry was assessed. Break-
even costs for six-pound pouches were estimated to be $2.62 (44¢ per pound), which

suggest significant cost and price disadvantages.

110

The market potential assessment yielded generally negative results. Food service
operators interviewed expressed general satisfaction with their current potato products
and will not readily switch to retort pouch potato products. Institutional wholesalers
indicated that an introduction of retort pouch potato products would necessitate costly
promotional efforts to displace existing potato products with no guarantees of success.

The research results suggest that it is difficult to market a plain, low-value
”commodity" type of product in a relatively expensive nontraditional container. A
number of industry executives and researchers believe that the greater expense of retort
pouch packages and processing technologies, with associated texture, handling, and
distribution benefits, can best be justified in combination with more value-added
ingredients such as meats, or perhaps potato products in sauces with spices and flavors
added. To the extent that higher value ingredients make the overall product worth more,
higher cost retort pouch packaging, processing, and handling constitute a smaller portion
of total costs and perhaps the total product becomes more acceptable to purchasers.
What such retort pouch food products might be, and whether some could be potato-

based value-added products, is a subject for future research.

LIMITATIONS OF THE RESEARCH AND SUGGESTED EXTENSIONS

One limitation relates to the design of the model plant. The cost estimation was
focused on determining the cost of various pieces of equipment that would make up the
particular configuration judged to be the most reasonable. That judgment was based on
a review of the relevant literature and consultations with various industry experts. It is
however, just one of many possible configurations. A differently designed plant might
have different costs and output capacity, which may yield higher or lower cost estimates

than the ones presented in this volume. The model plant was designed with a single

111

form/fill/seal machine, because the volume generated by even one machine is
substantial. The quantity generated by more than one machine might be so large relative
to any potential market that it could not be sold. In addition, each machine is fairly
costly - $144,000. Nevertheless, cost estimates from future research efforts could
include cost projections involving several fillers and a number of retorts. However,
without major design breakthroughs, cost differences of differing configurations are
expected to be fairly marginal.

To simplify and make the cost estimation process more manageable, one factor
that was ignored was the possibility that unit cost of output might be lowered if one
considered various tax strategies relating to purchase and depreciation of machinery and
buildings. The method chosen for this research was to use an annuity method for
calculating ”annual use cost" of machinery services. Annualized costs of building and
equipment were computed as shown in Tables 2a and 3a on page 80. Use of the annuity
method means that tax savings from depreciation are a function of "straight line
depreciation,” which is probably not the depreciation method that leads to the least cost
result in the early years of operation. Thus the annuity method is a simplification of cost
calculation that does not minimize short run depreciation costs. However, depreciation
costs are a small proportion of overall costs and any differences between the method
used and an alternative depreciation scheme are likely to have little impact on the cost
per pound of retort pouch potatoes, which is the key cost estimate upon which these
research results are based.

Another factor is that the State of Michigan or certain local governments might
offer property tax breaks, reduced utility rates, grants or other incentives to firms

locating in particular jurisdictions as a means to promote economic development. Such

112

incentives were not considered in this study, though they would also lower cost of
production.

Finally, interviews were carried out with a limited number of food service
industry participants who were judged to be sufficiently representative to provide a useful
market assessment. A larger sample of food service managers may provide a more
comprehensive view of the market potential for retort pouch potato products.
Additional interviews could also be the subject of a future research project which would

expand our knowledge of this potential food product innovation.

APPENDICES

1 13
APPENDIX A

PLANT CAPACITY FOR INSTITUTIONAL SIZE RETORT POUCH POTATO PRODUCT

Assume retorts are STOCK AUTOMAT 1300

 

 

 

Cage dimension are: Rack dimensions are:
(6 cages per retort) (6 pouches per rack)
3 2 " 3 2 "
3 2 "
31 . 1 " 32 "

 

 

 

 

 

 

 

 

1. CALCULATE NUMBER OF POUCHES PER RETORT BATCH
Assume each rack 2" high; Height of cage - 31.1
31.1” / 2" per rack - 15.6 ~ 15 racks
15 racks X 6 pouches/rack - 90 pouches/cage
90 pouches X 6 cages - ouc r etort batch

2. CALCULATE NUMBER OF POUCHES PER DAY IN THE PLANT
Length of retort cycle: 55 min at 250'F, 50 min load, come up, cool down, unload

55 min + 50 min =- 105 M. pgr retort gcle

Assume 16-hour workday(Two 8-hour shifts, retorts run continuously)
16 hrs.X 60 min - 960 min/day

(960 min/day) / (105 min/qcle) :- 9.1 ~ 9 batches per retort per day

Due to staggered retort qcles and down time, assume that the 2 retorts do
an average of 16 rather than 18 batches per day

16 batches X 540 pouches/batch - M poughes gr gay
3.CALCUI.ATE AVG. FILLER SPEED, QUANTITY OF POT. TO SUPPORT OPERATION
Assume filler operates 145 hours/day (870 min) due to 1.5 hours of breaks
(8640 Pouches Per (lav) / (870 mil!) - lemme/m (avs- filler Speed)
Assume 5.5 lbs. potatoes per 10.5" X 15" X 1.4" pouch (expect 10% loss, 5 lbs.

of product after retorting)
8640 X 5.5 - 475& (pg. 9f. gotgtoes m 931
Assume 45% loss due to peeling and culling;55% (.55) of raw product wt. remains

47520 / 55 - W
(86400 lbs/day) / (14.5 hrs)-5960 lbs/hr. (avg. qty. raw potatoes through plant)

(47520 lbs/day) / (14.5 hrs) =3277 lbs. /hr.(avg. qty. finished potatoes through plant)

114
‘ APPENDIX B

CALCULATIONS - WASTE DISPOSAL AND WATER USE

Note that waste charges are usually stated in terms of a sewer charge per 1000
gallons (mgal) plus a surcharge for the waste above a given threshold level (300 mg/l)

1. Determination of processing plant throughput in tons/hour
Throughput of raw potatoes 5960 lbs/hr (from Appendix A)
(59601bs/hr) -:- (20001bs/ton) = 2.98 tons/hour

2. Factors used in determination of water use and pollutional strength of wastewater
For the entire potato processing operation, the assumptions were(1):

Water use 4000 gal/ton of raw potatoes
BOD 55 lb/ton
T88 45 lb/ton
3. Conversion of factors in #2 to hourly figures
Water use 4000 gal/ton X 2.98 tons/hr = 11920 gal/hr (11.92 mgal/hr)
BOD 55 lb/ton X 2.98 tons/hr = 1641b/hr
TSS 451b/ton X 2.98 tons/hr = 134 lb/hr

4. Determination of the strength of the pollutants on which the municipal charges are
assessed

The relationship between the pounds of waste and its concentration in
wastewater is stated in the following equation (concentration is stated in mg/l -
milligrams/liter):

lbs waste = . . ' w te ow '
1,000,000

Manipulating this equation to state the result in mg/l:

1,000,999 _X 19s. waste = concentration of waste in mg/l
8.34 X (water flow in gal.)

Calculating the strength of BOD and T‘SS:

1.090.999 x 195 112s = 1650 mg/l BOD
8.34 x 11,920 gal

“H.009 x 134 lbs = 1348 = > Round to 1350 mg/l TSS
8.34 X 11,920 gal

115

5. Determination of charges for water and waste treatment
Charges are assessed for excess strength above 300 mg/l; rates must be applied
to a percentage of the pounds of waste representing the excess strength

M = 81.8% (BOD) 1359 . 300 = 78.4% (T88)
1650 1350

Calculate the hourly rates assuming that the surcharge for excess strength for BOD is
$0.10/lb and also $0.10/1b for TSS.

$0.10/lb X 164 lbs X 81.8% = $13.41/hr. for BOD
$0.10/lb X 134 lbs X 77.8% = $10.43/hr. for 1‘88
6. Determination of water and sewer charges per hour of plant operation
Water Use: $2.00/mgal X 11.92 mgal/hr = $23.84/hr
Sewer Charge $2.10/mgal X 11.92 mgal/hr = $25.03/hr
7. Determination of total cost per hour for wastewater treatment
Sewer Charge $25.03 /hr
BOD Surcharge $13.41 /hr
TSS Surcharge 910.4319r
TOTAL $48.87/hr

8. Determination of total cost per year for water use and wastewater treatment; assume
a 16-hour workday (2 shifts)

16 hrs/day X 5 days/wk X 52 wks/yr = 4160 hrs/yr

Water Use: $23.84/hr X 4160 hrs/yr = $ 99,174/yr {under
(Utilities,
Wastewater Treatment: $48.87/hr X 4160 hrs/yr = $203,299/yr {Table l

(1) These three factors were approximations of figures that appeared in Table 1.10,
Wastewater and Generated Pollution Leads by Commodity - Fruits and Vegetables
(page 21) in Gui r W ste ana e e ' t ood ' Allen M.
Katsuyama, editor, The Food Processors Institute, Washington, DC, 1979. The actual
figures for potato canning were 4300 gallons, 52 pounds BOD and 44 pounds T88, and
they were adjusted in consultation with Dr. Roy E. Carawan, Department of Food
Science, North Carolina State University, Raleigh, North Carolina. Dr. Carawan’s
assistance in preparing this estimate is gratefully acknowledged.

116
APPENDIX C

COST OF ELECTRICITY

A University of Georgia study on the costs of operation of a multiline vegetable
canning plant indicated electricity usage of 243,936 KWH for 1936 hours of operation.1

243,936 KWH / 1936 hrs = 126 KW per hour of plant operation

126 KW per hour of operation was for a plant capacity of 400 cases per hour of
24/303’s of vegetables. 400 cases per hour translates to raw procguct throughput of 3.2
tons/hour of green beans or 5 .3 tons per hour of sweet potatoes. The throughput of
raw potatoes through the model plant in the present study is estimated at 3 tons per
hour, somewhat less than the 5.3 tons of sweet potatoes. Therefore a level of electricity
use of 100 KWH was judged to be a reasonable estimate for the model plant. A
representative of Consumer’s Power Company of Michigan indicates that $0.10 per
KWH is a reasonable estimate of the cost of electricity, fough the actual rates vary,
depending on whether the firm selects Rate B or Rate C. The calculation for cost of
electricity for the model plant is (assuming 36 weeks or 2880 hours of operation per

year).
100 KWH X $0.10 = $10.00 per hour (column 4 of Table l)

2880 hours X $10.00 = $28,800 (col. 7 of Table 1)

 

1James E. Epperson, Charles T. Lewis and Ronald J. Williams, W
'- :1,‘ j! u .i o 1 1,3: {I ’I; ' 1' 0 ' 'b ‘ 01' .
Research Bulletin 285, College of Agriculture, University of Georgia, p. 50 of Appendix.
2Epperson, et al, 13.

3'Michael Nowak, Consumer’s Power Company, Saginaw, Michigan. Personal communication.

117
APPENDIX D

FUEL OIL FOR BOILER

The University of Georgia study of the costs of operation of a multiline vegetable
canning plant indicated a level of usage for fuel oil for boilers to provide hot water for
' the retorts of 76,588 gallons/year for 1936 hours of operation.

(76,588 gal/yr) / (1936 hrs/yr) = 39.54 gal/hr

As indicated in Appendix 3, since the volume of the raw product for the model plant is
somewhat less than for the Georgia example, a level of 80% of the Georgia plant’s level
of fuel oil consumption was judged to be reasonable.

39.54 gal/hr X 80% = 31.6 gal/hr or approximately 32 gal/hr

At a price of fuel oil of about $0.75 per gallon, usage per hour in the model plant
works out to:

32 gal/hr X $0.75 = $24/hr (col. 4 of Table 1)

2280 hours X $24/hr = $69120 (col. 7 of Table 1)

 

1Epperson, et al, Appendix, 48.

118

APPENDIX E

DURATION OF PLANT OPERATION PER YEAR

 

Number No. of Percentage, N0. of
of Months weeks relative to hours*
52 weeks/year

7 32 62% 2560

8 36 69% 2880

9 40 77% 3200

10 44 85% 3520

11 48 92% 3840

12 52 100% 4160

*Based on 8 hours/shift X 2 shifts/day X 5 days/week
X (No. of weeks/year)

1 19
APPENDIX F

TECHNOLOGICAL DEVELOPMENTS IN POUCH CONSTRUCTION

Laboratory studies on thermal processable films began in 1959. Commercial
introduction of retort pouch foods began in Europe in the late 1960’s, but the first
practical US. application was in the Apollo space program beginning in 1968. The US.
Army Natick Laboratory sought an alternative to the combat soldier’s C-ration served in
conventional rigid metal cans, but with quality at least equal to canned foods. The retort
pouch had a number of desirable characteristics: it was light, durable, and easy to open
and dispose of; it could be easily heated (a few minutes in boiling water); it could be
carried without interfering with normal movement, fit conveniently into combat uniforms,
and would not injure the soldier if he fell on it]

Natick laboratory personnel evaluated the durability and storage stability of the
pouch, its resistance to bacteria, and thermal processing temperatures and procedures.
The possible migration of pouch material extractives to the food was also examined;
polyolefin and polypropylene were both determined to be appropriate inner layer
material due to their inert nature; they would not react with any of a wide variety of
food products. Natick also studied whether overwrapping the pouch by paperboard
envelope or carton would be necessary; they concluded that it was. Several firms joined
in an effort beginning in 1968 to determine suitable pouch manufacturing and processing
methods: Swift, Pillsbury, Continental Can, Rexham Corporation, and FMC. Swift

established a pilot pouch processing line in 1970 and received USDA approval for Army

usage and testing.

 

1Williams, 15.

120
Two major kinds of testing were undertaken: Mg and am testing. A

variety of 5 ounce food items were packaged at the abovementioned pilot facility and
were tested for reliability factors: seal integrity, sterility, and overall defects. Natick
laboratories examined the resistance to damage from rough handling and abuse. Overall
results compared favorably to the performance of metal cans.2

Several of the cooperating firms then began to work independently on the pouch
and related processing equipment. Rexham and FMC proceeded to design and improve
the packaging and processing equipment. Continental Can actively pursued
commercialization of the pouch and purchased the pilot plant from Natick
Laboratories.3

One significant issue hampered the early commercialization efforts of retort
pouch foods: concern over the adhesive used to hold the three layers of the pouch
material together at the high sterilization temperatures. As early as 1974 the USDA
gave its approval to a number of food processors to market meat and poultry products in
the retort pouch, providing that the pouch material met Food and Drug Administration
regulations. FDA studies in 1975 indicated possible problems with the adhesive
components and USDA approval was withdrawn. To address these concerns,
Continental and Reynolds Metals introduced different thermal adhesives and bonding
agents. By 1977, the modified pouches were approved by the FDA, and subsequently,

the USDA.

 

2Neil H. Mermelstein, "The Retort Pouch in the US," W (February
1976). Cited in Williams, 18.

3Mermelstein 1976. Cited in Williams, 18.

121
APPENDIX G

EQUIPMENT CHOICES FOR THE MODEL PLANT

Planning the retort pouch processing facility requires a number of choices among
alternative technologies and kinds of equipment. Choices fall into the following
categories and each of these is addressed in turn: (1) pouch size, (2) pouch fabrication
method, (3) pouch filling machines (choice of features), (4) retorting method and (5)
potato peeling method. The appendix concludes with a summary of choices regarding

specific items included in the model plant cost estimate.

Pouch Size

Since there are as yet virtually no US. firms currently packaging foods in
institutional size pouches, there are no standard institutional sizes or even widespread
industry agreement on what is an institutional size retort pouch. Beverly’s view is that
institutional pouches can vary anywhere from 10" X 14" to 12" X 18".1 The thinner
pouch profile relative to cans is a major reason for adopting retort pouch technology.
This is a key issue. Starting with a given weight of product to be filled, product design
must consider what thickness of pouch is feasible relative to the length and width. For
instance, Beverly notes that to fill a pouch with 105 ounces of product (equivalent to a
#10 can), two alternative sets of dimensions are 12" X 18" X 1-1/8" and 10" X 14" X
2-1/4". He notes that there are higher cost implications as well as advantages in

choosing larger pouches: "The thicker the pouch becomes, the longer the sterilization

 

lac. Beverly, J. Strasser and B. Wright, ”Critical Roles in Filling and Sterilizing
Institutional Pouches,” Wm (September 1980): 48.

122

process required; this results in a higher capital investment for the same production.
More than offsetting this increase in initial investment, however, is the increase in
savings per year resulting from the use of smaller pouches.” Beverly also offers advice to
food processors in selecting an appropriate pouch size and offers several reasons why
this is an important decision.2
"... the food processor should abide by the recommendations of his
pouch supplier and recognize that there could be some possible negative
effects of trying to fill too much in a given pouch size: (1) Pouch seals
could be unduly strained with too much fill; (2) The greater the fill, the
greater the likelihood of contamination of the seal area; and (3) The
thicker the pouch, the greater the possibility of product quality
degradation from overprocessing.”
Hutchinson also cautions against allowing the pouch to become too thick. To place the
equivalent weight of product of a #10 can into a 12" X 12" pouch, it would have to be
2—1/2" to 3" thick, which is too thick for efficient heating. Preferable pouch thicknesses,

he contends, are 1-1/2" to 1-3/4".

Pouch Fabrication Method
Pouches are machine-filled one of two ways; either using preformed pouches or
with roll-stock:
1. W. Within this category there are again two possible methods:
a) Manufacturer-supplied pouches (which arrive already sealed on three
sides); the pouches are stacked in a hopper that dispenses them as
needed into the filling machine.

b) Pouches made ”in house” with a separate pouch-forming machine.

 

2Beverly, et al, 48.

123
2. Using M in which the laminate is fed into a form/fill/ seal machine.

Methods vary with different machines, but the pouches are filled and sealed on four
sides as part of a continuous process.

With option number one, the amount spent on pouches will generally be greater,
and the investment in machinery will be less than for a comparable form/fill/seal
machine. This is the method in general use in Japan and the Japanese have developed
machinery that can fill retail size pouches at high speeds. In the US. fillers designed
for use with premade pouches have been much more available than form/fill/seal
machines.

Strength of pouch seals is an additional issue that relates to the type of machine
chosen. Some processing experts contend that better control of pouch seals is achieved
through purchase of premade pouches, where the quality control (except for the final
seal) is the responsibility of the laminate manufacturer. This was probably true in the
1970’s - witness the delamination problems Nu-Foods and Creston Valley Foods whose
experiences were described at the end of Chapter 4. However, both the quality of the
film and of the form/fill/seal machines have improved considerably.

Others experts argue that today form/fill/seal is the superior method and that
food processors themselves should control seal quality.

A manager in Del Monte’s retort pouch division noted in an interview that there
are numerous technical details and problems to contend with in getting a new food
processing facility into operation. In that vein, it is argued, starting out with a pre-made
pouch system would simplify the process. Since form / fill/ seal equipment requires
sealing on all four sides during the process, installing a pre-made pouch system would

mean one less quality control factor with which the processor would have to contend.

124
Regular deliveries of pro-made pouches would also mean that the processing firm need
not maintain a large inventory.3
For filling large pouches, however, the choices of equipment narrow
considerably. Only two firms contacted in the course of this research produced
machines capable of filling institutional size retort pouches; both firms’ machines were of
the form/fill/seal type using a horizontal filling method. Though in principle there are

choices among competing technologies, in selecting the pouch fabrication method, the

use of roll-stock laminate is the only commercially available option.

Pouch Filling Machines

Pouch filling machines fall into two broad categories - vertical-fill and
horizontal-fill. Vertical fillers can be sub-divided into two sub-categories. Circular
fillers are ”constant motion” machines; they are widely used in Japan, but not in the US.
more commonly employed in the US. are the straight-line or ”intermittent motion"
machines (which have slower line speeds than the ”constant motion" machines).
Currently, most retort pouch food products are sauce based entrees, stews, or similar
food products that lend themselves to vertical filling. However, potatoes and other foods
that are large-size particulates can create problems with any vertical filling method -
there can be product accumulation at the bottom of the pouch. One expert pointed out
that sliced potatoes could stack up as they hit the bottom of the pouch, causing a wider
than desirable pouch. One solution would be to design a filler with a ”magazine" - a
rigid form that would hold the pouch at the desired thickness from the filling through the

sealing stage. Other possible solutions include a) allowing only a small pouch opening

 

3Stephen Hauser, Del Monte, Inc., Lockport, New York. Personal communication.

125
for filling and b) mechanically flattening the pouch after filling; this latter method would

likely damage the potato pieces.4
At present there are no commercially available vertical-fill machines for
institutional pouches. However, two firms were identified that manufacture
horizontal-fill machines for institutional size pouches. The filling machine selected for
the model plant is a straight-line form/fill/seal machine in which pouches are filled in a
horizontal orientation with the ”formable" pouch material (with two webs of different
thicknesses as described in the previous chapter). The filler is called a Koch Multivac.
Although the line speed of the Multivac is slow compared to vertical fillers (10
pouches per minute), it does have advantages. Considering the physical nature of
potatoes, the horizontal form/fill/seal is a good choice. As mentioned above, potatoes
are large-size particulates that do not flow into a pouch as readily as a sauce. Potatoes
are also susceptible to damage from pressure, so they must be packaged and handled
with some care. Given these problems, the ”formed container" retort pouch system
appears to have the capability to maintain a good quality potato. Filling the horizontal
tray with potatoes as it passes by the filling station is a superior method to vertical filling
for ensuring proper distribution of the potatoes in the pouch. In addition, the added
strength of the pouch material will protect the potato pieces more effectively, which is

especially important in packaging sliced and small whole potatoes (though less so for

diced and shredded potatoes).

 

4Tedio Ciavarini, US. Army Research Development, and Engineering Laboratories,
Natick, Massachussetts. Personal communication.

126
Type of Air Evacuation in Filling Machines

A key step in packaging food in retort pouches is removing excess air before the
final seal is made. Hutchinson points out that when packaging potatoes, only a very
small amount of gas should remain in the pouch. This is because potatoes are quite
sensitive to oxygen and will darken upon exposure. When this occurs, the food product
is frequently perfectly safe, but may not be an acceptable product in the eyes of many
consumers who place a high value on whiteness. This removal of air can be
accomplished by a number of different methods. As Peterson explains, ”Retort pouches
are usually vacuum sealed either by being placed into a vacuum chamber or by use of a
snorkel type of apparatus placed inside the pouch. Pouches can also be steam flushed
with either saturated or superheated steam just prior to sealing. The steam takes the
place of the headspace gas and condenses when cooled."5

Some argue that the vacuum chamber method is the most appropriate one for
evacuating air in the packaging of large volume solid food products. In this method the
pouch enters a chamber from which the air is removed mechanically (by a pump). The
pouch is sealed and then air is allowed to re-enter the chamber. Due to the difference
in pressure, the pouch collapses around the food contents, becoming fairly rigid.6 Kruse
notes that this process may work better with round white potatoes than with shredded
potatoes. He argues that the shredded potato can trap lots of air among the small

pieces, but with whole potatoes, the pressure will cause the pouch to conform to the

 

5Wayne Roger Peterson, "Heat Transfer Variables Affecting Process Determinations
in Conduction Heating Institutional Size Retort Pouches," Ph.D. dissertation, University
of Florida, Gainesville, Florida, 1984, 22.

6Ciavarini.

127

potato and the air removal will be more complete; some of this pressure will be released
during the retorting process as moisture is released by the potatoes:7

Others contend that the vacuum chamber process can damage the potatoes.
Netterburg argues that the more one tries to remove air from a pouch by using a vacuum
chamber, the tighter the container gets around the potatoes, causing stress.8
Christensen ayees, stating that "pulling a straight vacuum”, as the vacuum chamber
method is sometimes called, has a tendency to distort the product. He recommends gas
flush (which uses a small amount of nitrogen) a better system. The gas flush takes a few
seconds longer than a vacuum chamber, resulting in slower line speeds; the result,
however, is a better quality food product.9

A related issue is the amount of brine in the retort pouch. In a canned product,
the brine is added largely to facilitate the transfer of heat to the food product through
mnvectign currents; the ggnductl'on that occurs in the absence of brine results in a
slower sterilization process. Brine also serves the useful purpose of displacing air in the
package, contributing to the air removal process. However, the mechanical vacuum
process cannot be used for products that include brine, because the vacuum will cause
the brine to boil. Steam injection is better used with a product that includes brine. One
of the advantages of retort pouches relative to cans is the large reduction in the amount

of brine needed. However, in planning the precise nature of the potato products to be

packaged, another possibility is no brine. While this will allow the use of a vacuum

 

7Gunter Kruse, Gunter Kruse Packaging, Inc. Personal communication.

8John Netterburg, Shelf Stable Foods, Inc. Evansville, Illinois. Personal
communication.

9Robert Christensen, formerly with Creston Vally Foods, Creston, British Columbia,
Canada. Personal communication.

128

chamber, it means that there may be lots of head space (entrapped air). The use of
vacuum to get out this large amount of air can cause stress on the package. Hutchinson
contends that it is difficult to get below the level of 20 cc of air without the use of brine,
but that 23 cc is the appropriate target to achieve a fairly long shelf life and to maintain
the whiteness of the potatoes. This discussion on one technical detail, air evacuation,
serves to emphasize that a firm considering packaging large particulates such as
potatoes in institutional size retort pouches is entering relatively uncharted territory;
care must be taken in the planning process to consider such technical details.

Though the type of air evacuation method is an important issue, the selection of
the horizontal form/fill/sealing machine for the model plant somewhat limits the choice
of features in this regard. The Koch Multivac selected as the filling machine employs a
mechanical vacuum system. As noted above, there are problems with the use of brine in
a vacuum system. However, some flexibility in processing system design is possible since

the Koch machine also has the capability of using a gas flush system.

Retort Method
A retort is a pressurized vessel in which packaged foods are ”cooked" (sterilized)
by the food processor. Retorts that are used to sterilize pouched foods must have a
feature known as ovem'ding at figure. An informational bulletin from Ludlow
Flexible Packaging notes that "This [overriding air pressure] is required so that pressure
differentials are minimized between the inside and outside of the pouch during the
heating and cooling phase of the retort cycle. The technology has always been used by

those packing foods in glass jars. Further, to prevent excessive pressure buildup in the

129

pouch during retorting, the residual air content of the pouch should be less than 10
cc."10

Another important distinguishing feature of pouch retorting (versus retorting
solid containers - cans and glass) is that pouches must be 9.90M in retort racks. Filled
pouches may expand unevenly during the retorting process, but confinement in retort
racks ensures a maximum thickness, which facilitates uniform heat penetration. The
racks also restrict the pouch from excessive movement during processing. However, the
large number of racks required adds significantly to the cost of retorting. Also, the
precise manner that pouches are arranged on racks is subject to close scrutiny by the
Food and Drug Administration (FDA) and generally cannot be varied without gaining
further approval from the FDA. This rigorous approval process and the lack of
flexibility also add to the cost of establishing a retort pouch processing facility. The lack
of flexibility is due to the fact that pouch racks can officially only be used for one size of
pouch.

In selecting the retorting method, there are three main areas in which choices
must be made among competing technologies, each of which will be discussed in turn:
( 1) batch versus continuous retorting, (2) water/air versus steam/air retorting and (3)

retorting with rotation versus still retorting

WW

With 12mg): retorts, the food containers are placed in carts and wheeled into the
retort chamber, which is then sealed. After the retort cycle is completed, the first batch

of containers is removed, another is put in, and the cycle is repeated. With 95mm

 

10Continental Flexible Packaging (subsequently Ludlow Flexible Packaging),
”Continental Flexible Packaging Answers Your Questions on the Retort Pouch," n.d.

130

retorts, the containers move continually through the retort, but remain inside the vessel
long enough to sterilize the food contents. Continuous retorts generally involve
considerably larger capital investments and are appropriate for very large volume food
processing operations. Batch retorts are more appropriate for smaller volumes. The
initial capital investment is much smaller, and more retorts can be added as needed,
expanding plant capacity as sales of the food product increase. Due to the small scale of
the model plant for packaging potato products in retort pouches, batch retorts were
selected for the model plant. All of the retort pouch facilities currently operating in the
US. are of the batch type; none have yet achieved the large volumes necessary to justify
continuous retorts. A Japanese firm operates the only known system is the world for
continuous sterilization of retort pouches; its capacity is claimed to be 105-210 pouches

11

per minute. However, some promoters of retort pouch technology assert that

advances in technology and expanding sales of retort pouch foods will make continuous

retorting a cost-saving alternative in the foreseeable future.12

W

Cans are sometimes retorted in 100% steam, but retort pouches cannot be safely
retorted in this manner. Cans are sealed mechanically; the metal container and the seals
are thus strong enough to withstand this expansion. The use of brine in cans greatly
facilitates the removal of air in the canning process. In contrast, pouches are sealed by

heat and the seals are less able to withstand such pressures, because internal gas

 

11K. Yamaguchi, "Current Status of Containers for Theme-Processed Foods in
Japan,” Address to the International Packaging, Michigan State University, September
1985.

12Reynolds Metals Company, Richmond, Virginia, "Flex-Can Laminate Pouch
Comparative Economic Analysis,” Unpublished company report, 1 October 1982.

131

expansion during retorting may strain seals. Internal gas may be either air not removed
during processing or dissolved air released during processing.13

Many US. food processors have considerable experience in sterilizing canned
food, but Connor injects a word of caution about transferring this experience to retorting
pouched foods: "Processing the retortable pouch or other low-profile containers is
certainly more critical and requires more caution than the standard cylindrical can or
jar..." Continuing, he notes that "the pouch or tray is obviously not as resilient or rigid as
the standard container and, therefore, requires precise overpressure control during
sterilization and especially during the cooling phase. Whether a steam flush or vacuum
system is employed in the sealing operation, it is impossible to remove all of the residual
air in many products, and without proper overpressure control, these gases can expand to
the point where seal integrity becomes extremely doubtful.“14 Peterson also notes this
factor, that overriding air pressure is required to control this expansion of entrapped gas,
and adds that this can be accomplished by using either of two other retort methods:
water/air or steam/air.15 In the United States, processors have generally chosen the
water/air method; in Europe and Japan steam/air have generally been favored. Each

method has its proponents and detractors; some of their arguments are summarized in

the following paragraphs.

 

13Roger Griffin, Professor, School of Packaging, Michigan State University.
Personal communication.

14 Steven F. Connor, ”Sterilization Methodology Applied to Pouches and Trays." 9;;

Food Sciences Institute, Purdue University. WWW
L‘ortPcs W - e 011.01 ‘3'WW0111,0.ot‘ tr 14-15March

1979, 132.

15Peterson, 26.

132

Peterson notes that a critical issue in retorting is the maintenance of ”an pans
of the retort at the processing temperatures and ...... a mum rate of heat transfer
during processing..."16 Milleville concurs: W of heating, not rate of transfer

'17 In selecting a retort, uniform heating is a key

is the critical factor in retorting...
feature to consider; the fact that a particular model saves several minutes of processing
time should be a secondary consideration to a food processing firm.

Some of the arguments pro and con revolve around the ease of W
M of the different processes. Peterson notes that the water/air process "is
generally recognized as being less complicated to control." More specifically,
"temperature control of a steam-air process is more difficult...especially during the come
up period when there is a large initial heat demand."18 Stated somewhat differently:
”...you can do more things wrong with water and get by with it than you can with steam
using superimposed air pressure."19

One reason for the greater popularity of the steam/air process in other parts of
the world is that government standards are less stringent than those set by the FDA in
the US. This reliability issue in maintaining heat uniformity is thus a key reason for the
skepticism of some food processors toward the steam/ air method. Milleville concurs
with Peterson: "One reason for the reluctance [to use steam/air] is the...difficulty of

control of heat distribution with steam under superimposed air pressure.” Milleville goes

on, however, to note that for some pouched foods steam/air retorting may be the

 

16Peterson, 26, emphasis added.

17Howard P. Milleville, "Steam/Air Retorting of Pouches: Simpler, Less Expensive
Method for Processing with Overriding Pressure, Eood Erocflm' g, emphasis added.

18Peterson, 28.

19Irving J. Pflug (University of Minnesota). 53.; Food Sciences Institute, 21.

133

simpler and less expensive method: "...less equipment, less piping complexity and fewer
controls mean simpler and less expensive installation.” Peterson adds that ”there are a
number of commercially available retorts successfully utilizing steam-air as the processing
medium." Magic Pantry in Ontario, Canada, uses steam/air retorting; company
representatives express great satisfaction with that method and indicate that they are
able to achieve excellent temperature uniformity. They agree that a steam/air system
takes up less space and requires less pumping equipment.

A marked disadvantage of water/air is that the process leaves the pouches dirty
- residue may be left by impurities in the water. This necessitates washing the pouches
after retorting which adds an extra step to the processing line, increasing the cost of
operation; there may also be a problem of ”post-process contamination."20

Another disadvantage of water/air retorts is that filling and draining may be
time-consuming and may more involve more heat loss than steam/air.21

Since more retort pouch food firms today are using the water/air type of retort
than steam/air, the water/air type was selected for the model plant. This selection is not

an endorsement of the water/air method as the only method appropriate for sterilizing

the retort pouch potato product.

WWW
If a water/air type of retort is selected, an additional feature can be considered -
the ability to rotate the pouches during the sterilizing process. Its main advantage is to

shorten the length of the retort cycle due to improved heat transfer. The following

 

20John A.G. Rees, ”Sterilization Methodology Applied to Pouches and Trays." 5&6.
Food Sciences Institute, 90.

ZlGriffin.

134

quotes indicate some of the diverging opinions on whether pouches should be rotated
during the retort process. One source saw no advantage "in using a rotary process for a
pouched product, particularly because of the abuse that the pouch may have to
withstand."22 Stock, a German retort manufacturer firm, takes the opposite view:
”Stock has always recommended that rotation be used wherever possible.”

Stock America, Inc. has its headquarters in Milwaukee, Wisconsin. They
manufacture both the Automat and Rotomat lines of batch-type water/air process
retorts, the latter of which rotates the pouches during the cycle. As the quote above
indicates, they remain the chief advocates of rotating. In the retort process, the rate at
which the water moves past the pouches makes a difference in how quickly the heat is
transferred to the pouch contents. Still-type retorts may use such methods as forcing the
water to flow vertically or horizontally past the pouches; they may also use air bubbles to
agitate the water, further increasing the rate-of heat transfer. Whether to use vertical or
horizontal water flow and whether or not to bubble air through the retort are also points
to consider when evaluating alternative retort technologies. Stock’s philosophy is that
heat transfer is superior when pouches move through the water (the rotation method)
than when water flows past the pouches (still-type retorting). Peterson states the
arguments well and notes that the alleged problem may be even more significant with

institutional size retort pouches:

"There is some question as to whether retort pouches should be
rotated to enhance the heat transfer rate. Some manufacturers feel that
retort pouches should not be rotated under any conditions...due to
possible damage to integrity of the pouch seals. However, others have
found no problems with rotation and have found a reduction in process
time when pouches were rotated...although rotation during processing did

 

22Rees, "Sterilization Methodology." 5;; Food Sciences Institute, 89.

135

not adversely affect the seal strength fifty: processing, the seal strength

was reduced significantly 991mg processing. This reduced seal strength

may be more significant with t due to the

large quantity of product present. "

Beverly was with FMC Corporation, a manufacturer of retorts and other food
processing equipment, when he made this argument: ”We feel strongly that heat sealed
containers - pouches and semi-rigid trays - should not be agitated during processing
because of the danger of creating leakers...with contamination in the seal area, seal
strength (burst pressure) is even lower."24

Officials from Stock counter by citing test results from Europe and the US. that
indicate no adverse effects, "provided that proper holding devices or grid systems are
employed.” Proper overpressure control is quite important; automatic programming of
the retort cycle is suggested as a means of minimizing human error. Shortening the
process time can mean more retort cycles per day and can enhance the quality of the
product due to reduced cook time.25

The purpose of summarizing these arguments on both sides is not to endorse
either method, but rather to point out that it is an important point to consider when
equipment purchase decisions are being made. Griffin recommends purchasing the
rotation type since it will allow for more versatility in processing if the variety of

products processed by a firm increases, and if some of those products would benefit from

rotation-type retorting.26 The price of the retorts included in the cost estimate in the

 

23Peterson, 26, emphasis added.

24Robert Beverly, ”Sterilization Methodology Applied to Pouches and Trays.” _S_e_e
Food Sciences Institute, 104.

25Connor, "Sterilization Methodology." fie Food Sciences Institute, 133.
26Griffin.

136

next section of this chapter is for a still (non-rotating) retort; since the effects of rotating
on large pouches are still unknown, it was decided to “play it safe" and design the model
plant with the still retorts. The somewhat longer process time relative to the rotating
type of retorts required will provide a more conservative estimate of the plant’s output in
pouches per day.
Type of Potato Peeler

Three alternative peeling methods are abrasion, caustic (lye) and steam (or
combinations of those). Caustic peeling is still used in some vegetable processing plants,
but the lye generates a considerable toxic waste disposal problem. It is sometimes
argued that abrasion peeling is appropriate for lower volume and steam for larger
volumes of raw product. However, the owner of Michigan A cannery argued that even
for small-scale operations, the higher quality of potato that results from the extra
investment in steam peeling (and the reduced waste relative to just abrasion peeling) is

generally worth the investment.

137
APPENDIX H

TABLE 10 - STRUCTURE OF CAPITAL RECOVERY ANNUITY

 

 

Endl Capital Not Interest Due Amount of Annual Capi-

of Recovered by on Unrecovered Capital tal Recovery
Year End of Year Capital Recovered Charge

0 $10,000

1 $9,342 $900 $658 $1,558

2 $8,624 $841 $717 $1,558

3 $7,842 $776 $782 $1,558

4 $6,990 $706 $852 $1,558

5 $6,061 $629 $929 $1,558
6 $5,048 $545 $1,013 $1,558

7 $3,944 $454 $1,104 $1,558
8 $2,741 $355 $1,203 $1,558
9 $1,430 $247 $1,312 $1,558
10 ($0) $129 $1,430 $1,558

$5,582 $10,000 $15,582

 

BIBLIOGRAPHY

138

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