Wholesale considerations
Wholesaling farm products has its own set of variables when compared to other marketing channels like farm stands, CSA programs or farmers markets. At a Vermont Vegetable & Berry Growers Association meeting, Rose Wilson and Annie Harlow gave an overview of what farms need to consider before jumping into wholesale markets.
Wilson is a farm and food business planning and market consultant; Harlow is an independent business consultant focused on getting food profitably from farms to stores.
- Does the farm have the necessary infrastructure?
According to Wilson, the first thing a farm needs to ask is if it has the necessary infrastructure in place to wholesale. If not, the question becomes what infrastructure is needed.
Potential wholesale growers need to consider if their current wash and pack facility is sufficient. Some wholesalers require that the wash and pack meets GAP standards.
Another consideration is storage and whether upgrades to cold storage are needed. Then there are transport logistics to consider: loading docks, driveway access and refrigerated vehicles.
If infrastructure improvements are required, the enterprise then needs to determine the costs and decide where the capital will come from.
“If that capital is going to come from a lender, then we also have to look at your capacity to support debt service,” said Wilson.
- Does the operation need to change to support wholesale?
Wholesaling can generate additional expenses. “Once you take all of those aspects on the expense side, how does that impact the cost of production and overhead to the farm?” asked Wilson.
Wholesaling often requires expenses that are not necessary for direct-to-consumer sales. For example, a farm may need to change its packaging to include UPC codes or purchase a specific type of packing crate. Wholesale buyers may also require specific certifications which call for traceability and food safety protocols.
The farm may need a new point-of-sale and inventory management system or a different liability insurance policy.
If the farm is responsible for deliveries, the increased mileage may generate additional repair and labor expenses. If a third party, such as a food hub, picks up the product, they will likely charge freight fees.
If selling through a distributor, there will be a distributor margin that needs to be worked into the wholesale price the farm offers.
Shrink can be a huge hidden cost and can occur at various points from farm to consumer. This is especially true if growers aren’t accustomed to producing consistent quality products which wholesale requires. It’s critically important when factoring in wholesale pricing to account for who will bear the cost of that waste. If it comes back to the grower, they need to budget it into their pricing, said Wilson.
- Can the farm meet the needs of the buyer?
With wholesaling, the buyer is no longer the end user. Instead, the buyer is a produce manager, distributor or restaurant owner. “Their needs are what becomes central to whether they’re going to work with you or not,” said Wilson.
Wholesaler needs include adhering to the level of customer service they’re accustomed to, providing them product when they want it and meeting their prices points and product and safety specifications.
According to Wilson, most wholesale buyers work on a very immediate and urgent nature. They expect the farm to lead communication because they have many relationships to maintain.
Wilson said, “They are expecting you to be the one pushing the relationship forward.”
Farms need to remember that when they are pitching to a wholesaler, they are not only pitching their product but the level of customer service they can provide.
- How will wholesale impact cash flow?
“Cash flow is critical, and cash flow has actually turned many of our farms upside-down once they started to work with wholesale,” said Wilson. This is because wholesale buyers typically don’t pay invoices before 30 days. In some circumstances, it may take up to 120 days to receive payment. Sometimes, according to Harlow, farms may need to chase down payment from wholesalers.
Harlow reminded growers, “It’s not a sale until you have money in the bank.”
Farms therefore need to anticipate where their bridge financing will come from and whether they have adequate operating cash during the lag period. Wilson recommended establishing a line of credit based on anticipated selling volume and the payment lag time.
Shrink also comes into play with cash flow. For example, a wholesaler may receive a case of lettuce and deem that three heads need to be discarded. Depending on the terms of the contract, the farm may only receive payment for nine of the 12 heads. “So you’ve got to pay attention to shrink, and who’s paying for the shrink,” Wilson said.
Farms also need to have some sort of backup in the event a wholesale buyer backs out of the purchase agreement.
- What about pricing?
Wilson explained that grocers pay 65% of the shelf price for a given product. For instance, if a product is priced at $10, the grocer pays $6.50.
If a farm wants to wholesale directly to a store, they can start with the shelf price and work backwards – expecting about 65% of the shelf price.
If a farm works with a distributor, they will end up with closer to 47% of the shelf price because the distributor needs to cover their costs.
The farmer then needs to calculate if they can manage the logistics for less money than the distributor, taking into account time, fuel, trucking costs and meeting the wholesale buyers scheduling requirements.
Wilson said, “It’s really just allowing you to make an educated and informed decision before hopping in and then finding out, ‘Wow, this is going to be more difficult or more costly or not actually profitable than I anticipated.’”
by Sonja Heyck-Merlin
