Choosing Wholesale Markets for Local Food Products

Community, Local and Regional Food Systems September 28, 2015 Print Friendly and PDF

 

 

Authors:

Dave Lamie, Clemson University; 

Matt Ernst, University of Kentucky, Dept. of Agricultural Economics

Tim Woods, University of Kentucky, Dept. of Agricultural Economics

Gary Bullen, North Carolina State University, Cooperative Extension

Blake Lanford, Clemson University, Cooperative Extension

 

Introduction

Enterprising producers may find market opportunities in selling local food products, as some evidence indicates sustained market growth for local food. This publication will outline the main types of higher-volume (wholesale) market opportunities for local foods, including restaurants, food hubs, co-ops, groceries, and food distributors and wholesalers. A series of evaluation tools and worksheets will then help evaluate which market channel may be best for a farm or business.

 

 There is evidence indicating sustained growth in local food products, providing opportunity for enterprising producers. Many local foods are sold by direct marketing, and direct-to-consumer marketing by U.S. farms increased from $551 million in 1997 to $1.2 billion in 2007, according to a USDA analysis.1 Local meat and seafood, and local produce, again ranked at the top of restaurant food trends in the National Restaurant Association’s 2014 ranking.2 Volume of local foods demanded is also increasing, especially when food increases promotions of local products. 

 

Local food producers often experience more customer interest and demand for their products after local consumers make purchases through farmers markets, farm stands, Community Supported Agriculture (CSA), and other similar market channels

This publication provides a broad perspective of several likely marketing channels. Each market channel is described and compared side-by-side with other larger capacity market channels. Key considerations for producers assessing their market options are organized into important categories: relationships and communication, pricing, packaging, labeling, product presentation, product branding, certification requirements, insurance and risk management.    

 

Descrption of Local Food Wholesale Market Channels and Key Marketing Considerations

Understanding the key considerations for market channels, as described in this section, will helps make an honest appraisal of the producer’s ability to strategically and successfully navigate a new market.  Many food producers might decide to maintain a foothold in direct marketing channels while testing indirect markets.  Others might decide to narrow their focus, concentrating on fewer, higher-volume markets.  Others might prefer not to venture into higher-volume markets, deciding instead that they prefer direct connections with the ultimate consumers of their products.  Still others might find that working with an intermediary that complements and extends their own strengths, like a food hub, is the best option.  Producers should re-evaluate their initial decisions over time and, as conditions change, optimize their marketing portfolio accordingly. 

 

Restaurants and other food service providers, are often accessed by producers wishing to wholesale smaller volumes. From smaller establishments operated by a sole proprietor to large multinational chains, restaurants and their patrons continue to show increased interest in preparing and eating purchasing locally-sourced food.

 

Strong relationships and superior service are important when selling local food products to restaurants. Successful marketers build a good relationship with the chef or other persons responsible for purchasing. Delivering high-quality products at convenient receiving times for the restaurant promotes that relationship, as does catering to the restaurant’s preferences for labeling, packaging and certifications.

 

Local restaurants are more often promoting farm names, products and local brands on menus and other restaurant merchandising.  Some farms have found local restaurants an effective springboard into larger-volume product sales. Such opportunities do not typically just occur on their own, but must be planned for and specific actions must be carried out.

 

Food hubs are businesses or organizations that actively manage the “aggregation, distribution, and marketing of source-identified food products primarily from local and regional producers to strengthen their ability to satisfy wholesale, retail, and institutional demand.”3 A food hub business is often formed with a stated goal to benefit local farms while also performing food distribution functions; this goal differentiates the food hub from a traditional food distributor or wholesaler. Although for-profit food hubs exist, food hubs typically operate under a non-profit or cooperative business structure. Many food hubs aggregate and process goods at a physical location. Other food hubs may function solely in a virtual sense, providing a means by which customers may order locally-produced food direct from producers via the Internet.

 

Producers entering an existing food hub should strive to meet all its product, delivery and quality guidelines. Local producers involved in starting a food hub project may gain other relationships needed to ensure marketing success.  Some food hubs may offer resources to assist producers with product development and labeling. Some may also provide product liability insurance for products the food hub sells. 

 

Co-op grocery stores, or retail food cooperatives, function under the cooperative business model and are owned by their member-patrons. Usually operating as standalone stores, some food co-ops function as chains of two or more stores. Co-op members tend to be very interested in local foods, and co-ops have historically been receptive to carrying locally-produced products due to their broad commitment toward increasing local economic growth in general, and local food production more specifically.

 

Nearby co-op grocery stores can be identified through the Cooperative Grocer Network directory, located at www.cooperativegrocer.coop. The first contact point for establishing a sales relationship with the co-op is the co-op’s general manager, who might then direct producers to the manager of the department featuring the particular product Professionalism, reliable deliveries, high quality packaging and superior product quality is important among many co-ops buying local products.

 

Grocery stores account for slightly more than half of all consumer food spending in the U.S.4 The U.S. grocery market has become more concentrated since the 1980s, with fewer firms operating a larger percentage of chains and stores.5 In recent years, nonconventional food retailers like drugstores have become more important in food retailing. There has been some uptick in openings of specialty grocery stores, including those focused on local food, in some more populous areas. 

 

Many grocery chains have increased their emphasis on purchasing from local producers, and larger grocery chains tend to deal directly with high-volume producers that can guarantee delivery of a desired volume of products with consistent quality. Timely delivery is very important for selling to grocery stores of any size. Some chains may also require certifications, like third-party food safety verification, from a producer. Some larger chains require potential vendors to deal directly with purchasing departments away from the local stores. Producers can usually identify the point of entry through a discussion with the store manager, who may direct a producer to a resource at the corporate level.

 

Food distributors and wholesalers remain a primary means of moving food products from producer to consumer. Food distribution and wholesale firms typically specialize in either grocery or institutional (schools, hospitals, corporate cafeterias, etc.) markets. Distributors and wholesalers show increasing interest in sourcing local products and have proven effective, strategic partners when a strong relationship is established with local food producers.

 

Producers must usually meet high quality and volume requirements to be considered by food distributors and wholesalers. Many distributors will have certification and food safety similar to grocery purchasers and nearly all distributors and wholesalers and will require product liability insurance.

 

The table below provides a summary of key factors to be considered for each marketing channel described above.  Producers are encouraged to carefully reflect upon these and to address each of them in their strategic marketing planning process.  This table can be used as a planning framework by those contemplating entering these markets as well as an assessment tool for those who are already engaged in these markets.   

 

Key Considerations for Food Producer Success in Non-Direct Marketing Channels

 

Restaurants

Food Hubs

Co-op Grocery Stores

Grocery Stores

Food Distributors and Wholesalers

Relationships & Communication

Building trust and relationship with chef is key

Relationships commonly localized

General manager (store manager) is often involved in initial contact

Clear communication, invoicing is vital

Multiple communication points more frequently required

Pricing

Wholesale with potential price premiums, especially at fine dining or specialty restaurants

Ranges from wholesale to retail

Wholesale; some local premiums not uncommon

Wholesale

Wholesale

Packaging

Varies by restaurant; prefer convenience, pack sizes that fit kitchen and storage capacity

Requirements may vary

Prefer standard packaging; may be flexible

Industry standard packaging preferred and/or required

Well-defined, industry standard packaging requirements

Labeling

Fewer requirements; identify products by farm, product type/variety, and date

Labels must be product-appropriate, meet legal guidelines

Industry standard labeling required

Industry standard labeling required

Labeling can vary for bulk products; industry standard labeling required for retail items

Product Presentation

High quality expected; chefs rely on timely delivery; invoicing required

Food hub sets quality requirements based on end use; timely delivery and accurate invoicing required

Retail quality expected; timely delivery and invoicing required

High quality expected; timely delivery and invoicing required

Well-defined product quality standards and very high expectations; timely delivery, accurate invoicing

Product Branding

Farm brands becoming more common on menu listings and featured dishes

Some food hubs may develop own brands or use state/regional programs; may help promote farm brands

Commonly feature local suppliers in store merchandising and member communications

Branding must fit retailer guidelines; some in-store merchandising promoting farms may occur

Brand preferences vary according to product type, availability

Certification Requirements

Varies according to restaurant and chef

Varies by food hub

Varies by store and may vary by product; some stores prefer certified organic

Varies by chain; food safety certification requirements continue to increase

Varies by product; GAP and third-party food safety certification requirements are common

Insurance & Risk Management

Some restaurants may require product liability insurance

Food hub may carry product liability insurance; product liability may remain with producer if food hub does not acquire title to products

Varies by store and product

Product liability insurance requirement varies by store, chain

Require product liability insurance; may require additional food safety assurances

 

Assessment of Market Potential and Strategic Marketing Decision Making 

Decisions to enter higher-volume markets can impact farm and food businesses at all levels, from daily production and labor requirements to accounting systems and marketing strategy.  Some businesses have or can create the capacity to effectively manage these changes.  But, not all are up to the task.  The table below characterizes each of the non-direct markets discussed according to several strategically important business capacity dimensions: Market discovery and market entry, required production capacity of the producer, investment requirements, and income and growth potential for the producer.   Producers should carefully reflect upon these factors and consider their firms’ capacity to be successful in targeted markets.   The worksheet that follows the table is designed to help identify common areas of change required for new market entry. This is followed by key decision-making considerations for each of the eight topics from the previous chart. While these are not intended to be exhaustive, care has been taken to identify the most common issues encountered by local food entrepreneurs and the extent to which each market channel may require greater attention.

 

 

Food Producer Business Capacity Considerations for Non-Direct Marketing Channels

 

 

Food Distributors and Wholesalers

Food Hubs

Grocery Stores

Co-op Grocery Stores

Restaurants

Market Discovery/Entry

 

 

 

 

 

 Difficulty of market entry

High

Low to Medium

Medium to High

Medium to High

Low to Medium

 Food safety certification requirements

High

Medium

Medium to High

Medium to High

Medium

 Product liability insurance requirements

High

Medium

Medium to High

Low to Medium

Medium

 Receptivity to new products

Low to Medium

High

Medium

Medium to High

High

 

 

 

 

 

 

Production Capacity

 

 

 

 

 

 Volume requirements

High

Low to Medium

Medium to High

Low to High

Low to Medium

 Product packing/packaging requirements

High

Low to Medium

High

High

Medium

 Third-party certification needs

High

Low to Medium

Medium to High

Medium to High

Low

 

 

 

 

 

 

Required Investment

 

 

 

 

 

 Marketing time and management commitments

High

Low

Medium

Medium

Low

 Expectation of communication

High

High

High

High

High

 Typical length of time before payment

High (30-60 days)

Medium

Medium to High

Medium to High

High

 Required capital investment

High

Low

Medium

Low to Medium

Low

 

 

 

 

 

 

Income and Growth Potential

 

 

 

 

 

 Price levels

Low

Medium to High

Low to Medium

Medium

Medium to High

 Difficulty of market entry for competitors

High

Low

Medium

Medium

Low

 Potential for volume increase

High

Medium

Medium to High

Medium

Low

 

 

Marketing Mix Worksheet

 

Market Discovery

What potential markets are nearby?

Restaurants__________________________________

Grocery Stores ____________________________

Co-op / Specialty Grocery Stores________________

Food Distributors /Wholesalers________________

Food Hubs__________________________________

 

Who are the key people (buyers) I will need to talk to, at the potential markets?

 

Production Capacity

 What new products could be supplied to these markets?

 What are the volume and quality requirements for these markets?

 What additional production, product handling, and transportation resources will be needed (if any) to supply this volume?

 How could this increased volume complement or detract from existing production?  How will it affect established marketing opportunities?

 

Required Investment (Time and Money)

How much commitment will be required to enter the new market?

For example: a wholesale contract for producing a certain tonnage of vegetables per season requires much more commitment than a restaurant willing to possibly purchase fresh local vegetables as they are available.

 

What additional costs will be incurred to enter these markets? (Be sure to include packaging and delivery costs including containers, vehicle expenses and delivery time.)

 

How much communication and “service” does the buyer expect from the supplier?

 

Will the business need capital improvements (coolers, equipment, etc.) in order to supply the volumes required?

 

What are the regulatory barriers or hurdles to entering the market and what must I do to comply with them?

 

 

Growth Potential

Can my business leverage the potential new customer into other growth opportunities?

 

How does this opportunity fit into my long-term farm or business goals?

 

How easy would it be for another competitor to supply this market channel?

Do I have a competitive advantage?  If so, what is it? 

 

Market Evaluation by Topic

Relationships and Communication

 How proficient am I at the use of electronic communication?

 Am I willing to be regularly available to address specific product orders and/or quality concerns?

 Can I present myself and my business in a professional manner?

 

 

Potentially most communication intensive

Restaurant

 

Local grocery, co-ops

 

Food hubs

 

 

Typically less daily/weekly communication

Food distributors, wholesalers

 

 

 

Note: These rankings are only relative. Clear communications and relationships are just as vital to developing food distributor/wholesaler markets as for other markets, but local businesses (like restaurants) may demand more frequent communication.

 

Pricing

 What are the wholesale prices and price trends for comparable products?

 Does my cost of production allow me to sell profitably at wholesale prices?

 Are there seasonal changes in product prices? If so, do I have the capability to produce during periods of higher-prices?

 Are there adjustments I can make in my production practices to reduce costs of production?

 What are the expected future trends in production costs?

 

Typically closer to retail prices

Food hubs, fine dining 

 

Local restaurants

 

Local grocery, co-ops

Wholesale

Food distributors, wholesalers

Grocery and foodservice chains

 

 

 

 

 

 

Packaging

 What regulations and/or industry expectations are in place for packaging my products for wholesale or retail?

 What resources are available to help design a product package?

 What additional costs will I incur from packaging my products according to a specific buyer’s specifications?

 

Most extensive packaging requirements

Food distributors, wholesalers

Grocery and foodservice chains 

 

Local grocery, co-ops

 

Food hubs (retail products)

 

Restaurants

More packaging flexibility

Food hubs (processing)

 

 

 

 

Labeling

 Does my product require a label to be resold?

 What are the local, state and federal requirements for labeling my product?

 For bulk products, does the buyer require container labels?

 How will the buyer facilitate my branding to be carried forward to the ultimate consumer?  How might this impact sales of my product to other direct and/or indirect markets?

 

Most extensive labeling requirements

Grocery 

 

Food hubs (retail products)

Local grocery, co-ops 

Food distributors, wholesalers

 

 

 

Restaurants

Few labeling requirements

Food hubs (processing)

 

 

 

Note: Labeling requirements vary considerably between product types, and product type will likely be more of a labeling factor than market channel.

 

 

Product Presentation

Product presentation includes areas like quality, delivery and associated paperwork/invoices.

 How does my product quality stack up against industry standards?

 Do I have the transportation capacity to make deliveries of greater quantities? What are the costs (both time and cash costs) of delivery?

 Am I able to prepare and deliver invoices, even when I am not in the office?

 

Most demanding quality requirements

Fine dining restaurants 

Grocery 

Food distributors, wholesalers

Local grocery, co-ops 

Food hubs (retail products)

Possible quality exceptions, with communication

Restaurants

Potential for lower-quality product sales

Food hubs (processing)

 

 

 

 

 

 

 

Product Branding

 Does growing a product brand fit into my business marketing plan?

 How can I make sure each market channel is presenting my products with uniform branding or brand message?

 Are there similar products available, and how do I need to differentiate my product from those similar products?

 

Local branding potential

Restaurants 

Local grocery, co-ops 

Food hubs (retail products)

Regional and national brand potential

Grocery

Co-ops

Food distributors, wholesalers

 

 

 

 

 

 

 

 

 

Certification Requirements

Certification requirements will vary considerably across market channels. Producers should identify any necessary program certifications for entry into profitable markets and factor that into decision making. Key questions to ask include:

 

 Am I able to gain the necessary certifications in time for entering the new market?

 Will I need to employ outside help to walk through a particular certification process?  If so, have I identified who that will be and how much it will cost in both dollars and time?

 Will additional investment (both time and money) be required to gain particular program certifications?

 

Insurance and Risk Management

 Does the new market require Product Liability Insurance (PLI)?

 What will the additional cost be to obtain the necessary coverage?

 How does my food safety plan (GAPs, HAACP, etc.) measure up against standard requirements for my potential market?

 

Typically more stringent risk requirements

Food distributors, wholesalers Grocery

Possibly less-stringent

Restaurants 

Local grocery, co-ops 

Co-ops

Food hubs

 

 

 

 

 

 

 

 

 

Summary

Producers seeking to expand production of local food may access several kinds of wholesale markets. These include restaurants, food hubs, co-op grocery stores, grocery stores and food distributors and wholesalers.  Careful planning prior to attempting to access these markets should include gaining a clear understanding of what is required for each of these markets, an honest appraisal of the capacity of the business to fulfill these requirements, and an assessment of the overall impact these strategies will have on net income, cash flow, debt obligations, labor requirements, and the time investment required of the business owner and management team.  Going through the process of creating a written marketing plan will likely help producers reduce marketing mistakes during times when they are not thinking clearly.  Further, both external and internal factors will inevitably make it necessary for producers to remain vigilant and to make mid-course corrections over time.  

 

 

References

1 Martinez, Steve, et al. Local Food Systems: Concepts, Impacts, and Issues, ERR 97, U.S. Department of Agriculture, Economic Research Service, May 2010.

 

2 “What’s Hot 2014 Culinary Forecast.” National Restaurant Association, http://www.restaurant.org/Downloads/PDFs/News-Research/WhatsHot/What-s-H...

 

3 Barham, James, Debra Tropp, Kathleen Enterline, Jeff Farbman, John Fisk, and Stacia Kiraly. Regional Food Hub Resource Guide. U.S. Dept. of Agriculture, Agricultural Marketing Service. Washington, DC. April 2012. <http://dx.doi.org/10.9752/MS046.04-2012>

 

4 Economic Research Service. “Food Markets & Prices/Retailing & Wholesaling/Retail Trends.” http://www.ers.usda.gov/topics/food-markets-prices/retailing-wholesaling...

 

5 Martinez, Steve W. The U.S. Food Marketing System: Recent Developments, 1997-2006, ERR-42. U.S. Dept. of Agriculture, Econ. Res. Serv. May 2007.

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