Choosing Wholesale Markets for Local Food Products

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.