HARDWARE

Seeing Red

Animalens Inc. makes and markets red-tinted contact lenses for egg-laying chickens.
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He who laughs last, laughs best -- so Randy Wise doesn't mind the inevitable reaction when he tells people about his contact lenses for chickens. That's right, for chickens.

Think about it, he says. Tinted red, the lenses cause changes in the behavior of egg layers. They eat less, produce more, and don't fight as much. The lenses will remake the economics of egg farming, raising gross margins by 400%. And the last laugh may be Wise's.

Say what you will about the notion of chickens wearing red-tinted contact lenses -- and just about everyone, including Johnny Carson, has said something. To Randy Wise, it's a matter of simple economics. A commercial egg farm is a commodity business: the price of a dozen eggs is set by the market, and the expenses -- for feeding and housing the chickens -- are almost impossible to alter. Your average egg rancher makes do with profit margins on the vanishing side of thin.

But Wise, a 40-year-old Harvard M.B.A., thinks the contact lenses made and marketed by his company -- Animalens Inc. -- will change the rules. Over the years tests have shown that chickens wearing red-tinted contact lenses behave differently from birds that don't. The chickens are calmer, less prone to pecking and cannibalism; the mortality rate is lower. For a variety of reasons, some not fully understood, they also tend to eat less feed while producing, on average, the same size and number of eggs as other chickens (even a bit more). In financial terms, Wise predicts, the savings from all this improved behavior will add up to a quadrupling of chicken-ranch profit margins. And once farmers know that, Wise figures, he'll be off and running.

He could be sitting on a gold mine. The U.S. population of commercial egg-laying chickens -- layers -- is currently around 250 million. Because it isn't practical or safe to recycle old lenses at the end of a layer's yearlong productive lifetime, chicken farmers would buy new lenses every year and install them in new birds. Once a few key egg producers adopt the product, Wise thinks others will follow out of fear of what would happen if they didn't. "Nobody will want to be left behind," he says. The lenses might also be sold to farmers whose business is breeding chickens. And down the road, Wise believes, there are opportunities for related products. Though he'll begin in this country, the global market could be 24 times the size of the domestic one. And the U.S. market alone, at a lens price of 15¢ a pair, says Wise, is $37.5 million.

There aren't many new businesses that have been on the drawing board as long as Animalens, in Wellesley, Mass. In the early 1960s Wise's father, Irvin, was managing a chicken ranch north of San Francisco and became involved with a California start-up that planned to sell a highly unusual product: contact lenses for chickens. The start-up's founder, a medical supply salesman, had known a local chicken farmer who had some birds with cataracts and had discovered that the vision-impaired chickens were easier to handle than their sighted counterparts. It dawned on the salesman that there could be a market for a lens that blurred the vision of chickens. The company was called Vision Control Inc.

Vision Control -- which for a short period employed Wise's father full-time as vice-president and his mother part-time -- did write some orders. But the lenses, molded out of plastic, were inconsistent: they tended to irritate the birds' eyes, and though designed to be permanently installed, many of them popped out. The company soon went out of business, but not before the principals collected a good deal of data. When the lenses fit, Wise remembers, the product performed beautifully. "The chickens were easier to handle and they laid more eggs.'

In the fall of 1966 Wise went East to attend the U.S. Merchant Marine Academy, and in 1972 he started business school. He encountered many opportunities there, but the contact-lens business had hooked him. In fact, during his second year at Harvard, he investigated the market for a company he proposed would follow in the footsteps of Vision Control; the research became the basis of a business-school case study still in use. Like the original lenses, the product he had in mind would impair vision. What was the potential? He didn't project sales. But, if successful, Wise said, "We will have revolutionized the business of animal behavior in much the same way that IBM revolutionized the processing of data.'

When Wise tried selling the idea to venture capitalists, nobody bought it. For one thing, he hadn't pinned down details as to how the lenses would be produced and how much they'd cost. The venture capitalists were polite, Wise says. "But they tended to see it as a shaggy dog story." He was 25 and inexperienced.

Instead of abandoning the idea, Wise kept it in the back of his mind for almost 15 years. During that period, he held a series of high-paying consulting jobs, specializing in marine transportation. In 1981 he founded a graphics software company in Boston. All the while, Wise did his best to keep informed about the chicken business. He read Egg Industry magazine and other poultry trade journals. And he commissioned research into a new lens design -- one that relied on color instead of distortion. "Hardly a week went by when I wasn't thinking about contact lenses for chickens," he says.

Each year thousands of business-school students were exposed to the idea through the case study. Wise says it wouldn't have surprised him if someone had beat him to the punch. It was a concept waiting to be executed. But to his relief, nobody ever touched it.

Between 1979 and 1984, when Wise incorporated Animalens, he invested nearly $15,000 of his own money. In 1985 and 1986, when he sold his graphics software company to Lotus Development Corp. for a reported $12 million to $15 million (he owned about 20%), he put up another $100,000 to pay for prototypes and new molds. For the design work, he retained a well-known professor from Virginia Polytechnic Institute named A. T. Leighton Jr. The challenge, says Leighton, was to get the right depth and thickness of lens. The lens had to stay in the bird's eye for life. In January 1988 Wise felt they had a product that overcame the design flaws of the earlier lens -- and one that fell within the cost parameters he had targeted. The patent application was in the mail. Wise was ready. Now, all he had to do was sell it to the chicken farmers of America.

Consider how the typical egg producer makes money: he buys a 17-week-old pullet for $3.25. Then, over the course of the next year (the normal productive life of the bird), he spends some $9.40 maintaining it -- $7.60 on feed and another $1.80 or so for housing, lighting, and labor. His cost per bird: around $12.65. The average egg layer produces 21 dozen eggs in its year of work, which, at 60¢ a dozen to the farmer, generates $12.60 a year. If the farmer is lucky, he'll net another 25¢ by selling the chicken once its production falls off. In this example, the gross margin is a scant 1.6%.

Like many businesses, the commercial egg trade has undergone tremendous changes over the past two decades. What used to be a good-sized chicken ranch -- say, 100,000 birds -- hardly counts by today's standards. Given cost pressures, the most competitive producers have sought economies of scale -- big farms can, for example, mix their own feed. Currently there are about 50 egg farms in the United States with more than a million chickens; among them they manage nearly 55% of the country's almost 250 million layers.

Even the big guys have been hurt by recent trends. Americans have been eating a lot fewer eggs; since 1960 per capita consumption has plummeted from 335 to 235 per year. And despite the efforts of operators to hold the line, the costs of feed, labor, and overhead have been climbing. All this would be fine if egg farmers could keep on raising prices. But the price of a dozen eggs is continuously squeezed by oversupply. So every year farmers are driven out of business.

From the point of view of the individual egg rancher, there are very few opportunities for cost savings. Over the past decade, the farmer has brought on all kinds of automated equipment to minimize his labor needs. The modern-day chicken house is filled with Rube Goldberg-like contraptions: cage systems, feeding and watering systems, egg-packing systems. Eggs are shipped to market without being touched by human hands. So what else can farmers do? They can fiddle around with feed additives and look for genetic improvements. Smart operators are already doing these things.

But nobody -- nobody -- is using contact lenses.

Randy Wise figures he has three key selling points on which he can build his case. The first one -- that the lenses reduce cannibalism -- is something he's known since the 1960s. The calming effect of the color red has been corroborated again and again over the past several years by research on light and color at agricultural universities. The other two benefits -- that lenses reduce feed consumption and that they increase egg production -- have been noticed only more recently. Supported by fewer tests, they're more controversial. "Basically," Wise says, "we try to figure out what the rancher is most concerned about. But we like to talk about all three.'

Dealing with the effects of pecking, he notes, has been a chronic problem for egg farmers. All chickens normally establish a social hierarchy, or pecking order, though some breeds are more aggressive than others. When one bird bleeds, the other birds peck at it. Ranchers can lose up to a quarter of their flock to such cannibalism. They mitigate the results of this behavior by beak trimming. The procedure, better known as debeaking, uses a hot knife to cut off the tip of the beak. Debeaking, which costs from 3¢ to 5¢ per bird, doesn't solve the problem. Chickens still peck, Wise says, but less harmfully. The procedure reduces the 25% mortality rate, but it can still run as high as 12% to 15%.

"Since the red lenses absorb all colors but red," says Wise, "the chickens can't distinguish blood, because everything looks red. If the chickens don't see blood, they don't peck." In tests, Wise notes, the mortality rates for birds wearing red lenses dropped to less than 8%. And some of those deaths could be attributed to causes other than pecking. On 1,000 birds, farmers could save from $120 to $150, just as a result of reduced mortality. That's at least 12¢ per bird.

The effect of the red lenses on appetite results in even greater savings. It was first documented in a 1986 test at Virginia Polytechnic Institute. The researchers found that birds wearing lenses ate an average of 7% less than the control group. Wise says that the experiments in other locations confirm the same levels of feed savings, in some cases greater. "Because [chicken] activity is lower," he says, "the chickens don't need to eat as much." Using the 7% figure, a farmer could save around 54¢ per bird per year, or more than 4% of the annual investment -- a savings that would go straight to the bottom line.

But the biggest surprise is on the production side: chickens that eat less don't produce fewer eggs. Birds with lenses do tend to be a bit leaner, Wise says, citing the Virginia Polytechnic study and several other commercial trials. But the number of eggs they lay -- and the size of those eggs -- doesn't change. "The tests show that, if anything, production goes up by 1% to 3%," Wise says. For the average egg farmer, a 1% increase means another 13¢ of revenue for every bird -- another boost to profitability.

Altogether, Wise argues that the savings add up to a significant shift in the cost structure of egg production. Obviously, the value of these benefits fluctuates with the market. But right now, he talks about savings in the neighborhood of 80¢ per chicken -- practically 4¢ for every dozen eggs. Not bad if you consider the cost of a pair of lenses: 15¢ if you sign a three-year contract (18¢ or 19¢ otherwise). Animalens estimates that, based on an installation rate for two people of 150 pair per hour, operators should be able to install them for approximately 10¢ per bird. On 100,000 chickens a farmer would spend around $25,000 to save two to three times that. We're talking about a gross margin increase from 1.6% to 6% -- not chicken feed.

So why aren't ranchers lining up at Animalens's door?

Wise admits things haven't taken off as quickly as he hoped they might, but he says he isn't worried. "Any time you're introducing something that's new and different, there's a natural lag." People need to get used to the idea, he explains.

In February 1988 Wise attended the International Poultry Trade Show in Atlanta, accompanied by his father and two associates. From a small booth, they showed a video and displayed the lenses for the first time. They met lots of chicken people and collected business cards, but nothing concrete developed. "People would say, 'We're not ready to do anything now,' " Wise recalls. "They wanted to see more data." The reaction to a $60,000 marketing campaign last summer -- which included a glitzy mailing to the top 200 egg producers and two-page ads in several poultry magazines -- was lukewarm as well. Lots of inquiries, but most of the discussions have led nowhere.

In some cases, chicken farmers think that Animalens's story is too good to be true. Some operators are skeptical, for instance, about the installation. "I don't think handling the birds and installing lenses can be as simple as they say," offers a poultryman from Iowa. Wise, however, sticks to his guns. "Yes, it's labor intensive," he says. "So is vaccinating. But two people working together can do 1,200 birds a day. I've done it myself.'

Many ranchers question how the product will perform in their specific setting -- say, a 700,000-bird operation in North Carolina. Given variations among breeds and management practices, Wise says one can't know for sure. "We tell ranchers to run their own trials." Animalens offers to help farmers design the trials and will assist in the initial installations. "If, based on the test, there's no savings," Wise says, "a rancher would be stupid to buy the lenses for his whole flock.'

A few ranchers have told Wise and Animalens's sales vice-president Jim Collier, who came to Animalens from the computer industry, that they'd gladly test the lenses if Animalens provided them for free. "We won't pay that kind of money until we know they work," says the manager of a million-bird operation in Georgia. A few months ago the company was willing to make deals to generate more data; it provided a few hundred pairs of sample lenses, for instance, to an egg farmer in Connecticut. But now, Wise opposes the idea of giving away product. "We want to work with guys who show a level of commitment." When people pay, he thinks, they'll try harder to realize the benefit.

Until last fall Wise thought that ranchers would be jumping at the opportunity to test his product. He still thinks that once ranchers test the lenses and are sure that they deliver, they'll buy them on a larger scale within a year. Wise had wanted dozens of trials happening simultaneously at farms all over the country. These farmers' decisions might influence others to adopt the product without additional tests. But it hasn't worked out that way. Why? Because the first step -- getting farmers to do the trials -- is taking a lot longer than Wise expected.

The product is now being tested in a few locations. Last December a major ranch in northern California began trying the red lenses on 20,000 birds; smaller field tests are being conducted in Connecticut, Oregon, Florida, and Virginia. There's an academic study in progress at Purdue University.

The company will pass a major milestone, says Wise, when the folks who are testing shift to full-scale adoption. "Having a few happy customers is a lot different from having three or four tests with good results.'

Ultimately, Wise thinks, egg farmers will act in their own interests: if it's known that a few ranchers are achieving superior results with the lenses, others will follow. From that point on, he thinks, the job of selling will get easier. "It's not like there are 2 million potential customers. In the United States there are fewer than 200 major farms. They'll know how to find us, and we have a directory with their names and addresses.'

Given the delays, Wise doesn't expect sales to materialize much before the end of the year. In 1989 he figures the company will lose about $336,000 on sales of $329,000. But it will turn profitable in the middle of next year, he thinks, once test results are circulated. In 1990 Animalens will be a $2.5-million company; in 1992 a $24-million company, with pretax earnings of $6 million. The 1992 number may be conservative, he says. "It's based on selling to less than half of the commercial ranches in the States and only about 5% of the worldwide market.'

Until early 1988 Wise was bankrolling virtually everything himself. In addition to $100,000 of equity, he personally guaranteed a $175,000 credit line. Since then, he's managed to raise a total of $825,000 from private investors (mostly friends and professional contacts). He still owns 55% of the company.

The rate at which the product takes off will determine how much additional outside capital Animalens needs. Because things are running behind schedule, the company has been tightening its belt. The vice-president of marketing was recently let go. On January 1 Wise and the three other employees took pay cuts ranging from 15% to 25%.

When the lenses begin to sell, Animalens wants to be ready. Wise has contracted the manufacturing to a Massachusetts plastic injection-molding company, and he's been accumulating inventory. With six machines cranking away, the plant can make about 80 million pairs annually, enough to generate $12 million of revenue.

As a matter of policy, Animalens intends to stay away from independent sales representatives and build a dedicated sales and service staff of its own. Eventually, Wise hopes to place sales-service representatives in satellite offices -- first in the United States and later in offices overseas. Not many, he says; perhaps 10 or 15. But he refuses to do anything until the revenues start to materialize. "I've learned from earlier experience that you shouldn't spend it until you've got it.'

That's where things stand. Randy Wise thinks he's got an awfully good shot at changing the way that egg farmers do business. "That's what kept me from letting this idea die," he says. He's put up a lot of his own money and convinced many of his friends to do likewise. In Wise's mind, it's not whether his product will succeed, but when.

The only people who haven't signed on yet are the people who will determine the outcome: the ranchers themselves. Wise thinks he's on the right track. "Chicken farmers aren't known for jumping the gun," he comments. Whether he'll be able to win their confidence before he loses his own remains to be seen.

* * *

Research assistance was provided by Leslie Brokaw.


EXECUTIVE SUMMARY

THE COMPANY

Animalens Inc., Wellesley, Mass.

Concept: Make and market red-tinted contact lenses for egg-laying chickens, altering their behavior so they will fight less, eat less, and produce more eggs -- increasing egg-ranch profitability

Projections: Eventual pretax net margins of 25%; 1989 sales of $329,000; 1992 sales of $24 million

Hurdles: Persuading historically conservative egg farmers, operating on thin margins, to risk money up front for an unproven product; sustaining the company in the face of slower-than-expected product acceptance; defending an easily copied product from competitors likely to enter after the market has been opened

THE FOUNDER

Randall E. Wise, 40, CEO

Randy Wise's decision to sell contact lenses for chickens is not the result of a sudden impulse. He's been preparing for this since he was a teenager in California.

Back in the the early 1960s, his father, a chicken rancher, got involved with a similar venture. The idea then was to reduce the cannibalism of egg-laying chickens with a lens that distorted their vision. The business flopped, but the goal -- improving the economics of egg production -- is something Wise didn't stop thinking about.

At Harvard Business School during the early 1970s, he wrote a popular case study that evaluated his father's ill-fated experience and outlined the opportunity for a new company. It explored the economics of egg ranching and examined the options for marketing the new lenses. Even today, the case (which sells about 6,000 copies annually) is used in business schools all over the country to highlight pricing and marketing questions.

Wise hoped to launch the business right after business school, but he couldn't get the financing. "Investors had a hard time relating to egg production," he recalls. Fifteen years later, with money in the bank, he's raring to go again.

Wise thinks the odds of success have improved with time. For one thing, plastic molding technology has moved way ahead. Chicken farmers, too, are a little less resistant to newfangled ideas than they once were. And, having built one successful business, Wise believes he knows how to build a second. Initially, for example, he's got a team of just three full-time employees, and he's resisting every impulse to spend money in advance of sales. "I'm a lot smarter than I was when I wrote the business-school case study," he says.

So what does he worry about? These days, Wise says, the biggest danger may be overconfidence. "The way I see it, the next 12 to 18 months are critical. As much as we believe in this, we have to sell it. You can't believe it's going to happen until it actually happens.'


FINANCIALS

Animalens Inc. Projected Operating Statement

(in $ thousands) 1989 1992

Sales $329 $24,050

Cost of goods sold 195 13,425

Gross margin 134 10,625

Expenses

General & administrative 247 1,280

Marketing 126 961

Sales 96 1,979

Research & development 0 350

Net interest 0 (185)

Total expenses 469 4,569

Profit before taxes (336) 6,056

Animalens Projected Sales
(in $ thousands) Sales Profit

1989 $329 ($336)

1990 2,483 391

1991 12,170 3,100

1992 24,050 6,056


WHAT THE EXPERTS SAY

FINANCIER
DAN TESSLER

Partner at Tessler & Cloherty Inc., a $50-million venture capital firm in New York City; former president of a feed-supplement company

The basic economic premise that the business addresses is a reasonable one, but I sense that Wise and his people have miscalculated the uniqueness of their selling proposition from the point of view of the people they're selling to. Wise seems to believe this product really can and should sell itself, because it's so overpoweringly valuable and important that customers shouldn't be able to resist it.

Well, I think the reality is that producers in this field are constantly bombarded with ideas for improving their cost/output ratios. A lot of these products come with the same pitch: "Your margins are very low, this can decrease your cost, so it'll multiply your profits by a lot. Buy some." I think Wise doesn't have enough respect for the volume of such opportunities that are presented to producers, who are very conservative people. They have a complex system, which works. And they don't take altering it lightly.

I think Animalens probably needs to spend a good deal of money sponsoring extensive, repeated field trials, putting together a database that encourages leading producers to say, "It really is worth doing my own test.'

I think it will be very hard to sustain the 25% pretax margins that are projected. These farmers who work for pennies a bird are people who force their suppliers to work for pennies per bird, or minimum possible profit. And that pressure backs up through the entire system in the poultry industry. If you don't have a real proprietary position -- and you don't if you're not selling anything more than an injection-molded plastic product -- then you can be sure that there will be alternate suppliers.

My guess is that Animalens needs more money to do what it expects to, but I'd probably not invest. If it were a clearly proprietary and protectable product, we might be interested. As it is, it looks like a one-shot nonproprietary technology.

I think Animalens as a product may well succeed -- if it works and if it produces the kinds of benefits to cost outlined in the article. Whether the company will succeed is not necessarily the same question.

OBSERVER
FREDERICK S. NICHOLAS

Executive vice-president, Avian Farms International Ltd., Winslow, Maine, a chicken-breeding company

The best thing Wise could do is live with the people who are testing the product and do whatever he can to help things run smoothly. It will take a lot of hand-holding. The success of any test depends on more than the product -- it's how the rancher is managing the product. So the company needs to have people working for it who can get in the chicken houses and put lenses in and help farmers any way they can. I'd put the money there, not in advertising. If the tests work well, things will happen.

Will the company be successful? I certainly don't see it happening as fast as Wise does, even if the lenses provide all the benefits he says they will. You're up against the standard resistance of a low-margin industry, in which products that don't work can turn you from a profit to a loss.

ACADEMIC
JOHN B. CAREY

Associate professor and extension poultry specialist, North Carolina State University, Raleigh, N.C.

It seems to me that Wise should be talking in greater detail about the way the lenses work. I don't think it's enough to tell egg farmers that the product saves money. They're used to hearing that from folks with suits and briefcases, and they're pretty skeptical. They'll want details about the physiology or they won't believe it.

Wise will also have to provide more detail about the installation. Two people installing 1,200 pair a day may seem fast to him, but it sounds like a snail's pace to me, particularly when you're talking about chicken houses with 100,000 birds. It means you'd need about 20 people doing nothing but putting in lenses for around eight days straight. Even if the labor cost only works out to 10 a chicken, not every rancher has access to that kind of manpower.

Is there a market for these lenses? Assuming they're relatively easy to install and that they stay in place, I imagine there is. Right now, though, it's an awful time to sell anything to chicken farmers. Many of them can't afford new birds -- it's all they can do to cover their losses. Even when the industry recovers, I don't foresee the market penetration Wise does. It will have to be really obvious to the farmers who don't use his lenses that competitors have an advantage over them.

INDUSTRY SPECIALIST
RAY A. GOLDBERG

Professor of agriculture and business at Harvard Business School; a director of several companies, including a poultry-breeding business in Glastonbury, Conn.

The most glaring weakness I see with Animalens is that Wise didn't think through the whole question of how new ideas get adopted.

In every segment of agriculture, you've got leaders. The whole psychology of change is based on example. If you get one well-known and successful farmer doing something new -- and being satisfied with it -- that's 10 times more valuable than getting others who aren't industry leaders. These guys should have looked at the poultry industry and asked, "Who are the three leading university researchers?" And they should have done the same thing with chicken ranchers and convinced one or two of them to try the product. Their mistake was to think purely in economic terms. They said, "Here's an industry that needs our product because cost savings should automatically be embraced." They lost time.

In the best of times, egg production is a high-volume, low-margin business. As a group, farmers have been losing money over the past year. It's very difficult to take on new technology when you're squeezed. Farmers, for example, won't buy fertilizer when they're losing money, even though it's obvious that they should. But the industry should be recovering over the next 12 months. Animalens should be using this period to make sure the tests are done properly so that the credibility is there when the industry improves. If the tests confirm what they've been saying, I think they have a viable shot.

Last updated: May 1, 1989




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