The Financial Performance Implications of Differential Marketing Strategies: Exploring Farms that Pursue Local Markets as a Core Competitive Advantage

Transcription

1 The Financial Performance Implications of Differential Marketing Strategies: Exploring Farms that Pursue Local Markets as a Core Competitive Advantage DAWN THILMANY, BECCA JABLONSKI AND A LLISON BAUMAN, COLORADO STATE U TH EAAE SEMINAR NEW DIMENSIONS OF MARKET POWER AND BARGAINING IN THE A G RI-FOOD SECTOR: ORGANISATIONS, POLICIES AND M ODELS. G A ETA, ITALY, JUNE 9-10, 2016

2 Differential Marketing Strategies in Food Systems Growing public interest in regionallyfocused food systems (Low et al, 2015; Martinez et al., 2010; Union of Concerned Scientists, 2013). Given some intend to support the viability of farms, important to assess if and when that is true Initial results on first phases of a metaanalysis of secondary data Relate to other US food system projects

3 U.S. Local Food Systems

4 Evidence of Profits from Direct Markets? Learn more about best practices and economics of food system initiatives: A conceptual typology of food system initiatives to organize economic analyses How can we assess the profit margins and impacts on financial viability? Sharing where we are now: Conceptual graphics Preliminary analysis of ARMS data How does this intersect with other analyses and case study meta-analysis?

5 A Conceptual Framework D R I V E N B Y R E S U L T S F R O M F O U N D A T I O N A L R E S E A R C H

6 A Typology of Farms Direct Marketing Very Small High Value added Value Food Chains Higher Volume High Value Trouble Zone Lower Volume Low Value Added Commodity High Volume Low Value Added Modified from: Stephenson, Agriculture of the Middle

7 Local Foods and Small Farms Source: Vogel and Jablonski June

8 Farmers Markets -Local customers -Customers searching for multiple goods -Restaurants CSA -Informal production contract with households Farm Direct to Wholesale -Restaurants -Institutions -Specialty retail Multi-Farm CSA -Restaurants -Institutions -Specialty retail Roadside Stand and Online Sales -Loyal customers -Targeted visitors/tourists Food Hubs -Restaurants -Institutions -Specialty retail Farm Direct to Wholesale -Institutions (Farm to School) Traditional Distributor Bauman, A, D. Shideler, D. Thilmany, M. Taylor and B. Angelo, An Evolving Classification Scheme of Local Food Business Models. extension CLRFS Resource page. May 2014 online:

9 Table 1: Market Typology Advantages & Disadvantages Market Orientation Roadside Stand and Online Sales Farmers Markets Customers Local, traveling and national households Local households, travelers Managerial Control Pricing Power Market Volume Potential Full control High Low to high Full control High Low to medium CSA Local households Full control Medium Low Farm Direct to Wholesale Multi-Farm CSA Food Hubs Traditional Distributor Local, independent businesses, institutions Local households and businesses Local businesses and institutions All buyers Full control Medium Medium Shared control Medium Medium to High Shared to limited control Limited control and pricing power Medium Medium to High

10 There is a likely tradeoff between volume of sales and two key management factors: 1) Managerial control retained by producers 2) Pricing power of producers Is there an optimal place on continuum for an operation?

11 Sales per labor hour percentiles, by aggregated marketing channels Source: Schmit and LeRoux 2014

12 Distribution of Labor by Marketing Activity, Top (75 th Percentile) and Bottom (25 th Percentile) Performing Channels, All Direct and Wholesale Channels Source: Schmit and LeRoux 2014

13 Results W H A T C A N W E L E A R N A B O U T D I F F E R E N C E S I N K E Y F A C T O R S A N D H O W T H E Y R E L A T E T O F I N A N C I A L V I A B I L I T Y?

14 Table 1. USDA ARMS sample of Local Food Farmers and Ranchers No. of observations Population size Market Channel D2C ,186 Intermediated ,703 D2CIntermediated ,012 Alllocalfood 1, ,901 Nonlocalfood 16,416 1,935,568 Local food producers by farm scale (GCFI) 1kto75k ,563 75kto350k , to1Million 104 3,922 Million and higher 107 3,607

15 Table 2. Summary Statistics for Local Food Farmers and Ranchers, by Gross Cash Farm Income ROA (26.12) Under $75,000 $75-350,000 $350,000 and above 1.29 (2.45) (2.35) Labor Share of Exp (0.01) (0.02) (0.02) Fuel Share of Exp (0.01) (0.01) (0.00) Utilities Share of Exp (0.01) (0.01) (0.01) Rent Share of Exp (0.01) (0.02) (0.02) Share Direct to Consumer (0.02) (0.04) (0.04) Share Intermediated (0.01) (0.03) (0.03) Share Direct & Interm (0.02) (0.03) (0.03) Localfruitveg (0.02) (0.03) (0.03) Localfieldcrop (0.01) (0.02) (0.02) Localanimal (0.02) (0.03) (0.03) Observations

16 $1-75,000 $75-350K $350-1 Million > $1 Million Labor Labor/ Gross Asset Off-farm Cost % Sales Turnover income Debt to Asset Q1 7% % $ 62,818 12% Q2 8% % $ 68,718 11% Q3 7% % $ 65,099 7% Q4 8% % $ 76,291 3% Q1 18% % $ 30,914 23% Q2 22% % $ 34,744 9% Q3 23% % $ 56,246 10% Q4 22% % $ 52,203 17% Q1 32% % $ 57,087 32% Q2 25% % $ 34,850 10% Q3 26% % $ 54,567 9% Q4 34% % $ 26,232 28% Q1 35% % $ 30,010 21% Q2 30% % $ 39,773 11%

17 How do top performers differ? Farms with greater scale (over $350,000 but less than one million in gross income) Over half of the sample is operating at a profitable level at this scale. Debt use bimodal Best and worst performing farmers relatively higher levels of debt. One could imagine a situation where the poorest performing operations see debt as a solution for cash flow shortfalls, Whereas the best performing operations see debt financing as an opportunity for faster growth.

18 Efficiency measures among quartiles Asset turnover generally highest among best ROA farms Exception is efficiency in smallest sales class, perhaps due to low capital investments Also have high labor productivity Labor productivity important, but less so for those grossing over $1 million Perhaps this is related to transition to wholesale markets that require more capital investments.

19 Connecting to Value Chains W H E R E C A N W E L E A R N M O R E A B O U T T H E C O N T R I B U T I O N S O F I N T E R M E D I A R I E S T O F I N A N C I A L V I A B I L I T Y?

20 Meta Analysis of Food System Case Studies 114 Case studies from over 200 when criteria to filter used Profitability % Records Highly profitable (over 5% net profit) 0.00% Profitable (between 2% and 5% net profit) 5.83% Breakeven (between 0% and 2% net profit) 10.68% Cash flow neutral (total expenses equal revenues) 0.97% Net loss (total expenses exceed revenues) 5.83% Unsustainable loss (variable expenses exceed revenues) 0.97% Unknown 75.73% Angelo, B, B. Jablonski and D. Thilmany. Meta-analysis of U.S. intermediated food markets: Measuring what matters. Forthcoming. British Food Journal.

21 Significant Differences for Viable Table 4. Specific market outlets reported in case studies, sorted by prevalence % of viable businesses % of nonviable businesses (or unknown) Variable Direct market outlets*** Farmers market 11.76% 23.26% Community Supported 5.88% 5.88% Agriculture (CSA) Internet/mail order sales 11.76% 17.44% Buying clubs 11.76% 9.30% Farm stand/store 11.76% 10.47% Delivery to customers 5.88% 11.63% Intermediated market outlets** Grocery retail 76.47% 46.51% Restaurant 41.18% 46.51% Institution 5.88% 37.21% Distributors 29.41% 20.93% Other 5.88% 11.63% Value-added processing 11.76% 5.81% Note: Asterisks indicate respective significance levels: * α = 0.10; **α = 0.05; ***α = Chi squared tests were performed to test differences among samples for reported use of direct market outlets and intermediated market outlets categories.

22 Table 6. Location and number of farm vendors Variable Geography of farm vendors** % of viable businesses % of nonviable businesses (or unknown) 23.53% 9.30% Local ( 50 miles) Near Regional (>50-<250 miles) 23.53% 19.77% Far Regional ( miles, or within state) 11.76% 18.60% Multi-state (>400 miles or outside of state) 23.53% 16.28% International (outside of US) 5.88% 3.49% Unknown 23.53% 9.30% Table 7. Location of markets and number of products Variable Geography of Markets** % of viable businesses % of nonviable businesses (or unknown) 5.88% 23.26% Local ( 50 miles) Near Regional (>50-<250 miles) 11.76% 6.98% Far Regional ( miles, or within state) 11.76% 9.30% Multi-state (> 400 miles or outside of state) 47.06% 32.56% International (outside of US) 5.88% 1.16% Unknown 5.88% 23.26%

23 Moving Forward Do the key themes identified in case studies across intermediated markets map out future research needs? Are generalized ranges an appropriate first step in identifying best practices and patterns among enterprises emerging as successful, sustainable and resilient?

24 The NIFA AFRI Team Dave Shideler Department of Agricultural Economics, Oklahoma State University, 323 Ag Hall, Stillwater, OK Allie Bauman, Becca Jablonski and Dawn Thilmany Department of Ag and Resource Economics, B325 Clark, Colorado State University, Fort Collins CO , Blake Angelo, Manager of Food System Development, City of Denver

25 Other Projects and Staying Connected Website and listserv: localfoodeconomics.com

26 Questions? D A W N T H I L M A N Y C O L O R A D O S T A T E U N I V E R S I T Y D A W N. T H I L M A N C O L O S T A T E. E D U

27 Appendices

28 Table 2: The Flow of Money Differential Expenditure Patterns Larger share of expenditure spent on labor, marketing, and in local economy Larger share of expenditure spent on labor, marketing, services, and inputs Higher capital expenditures and purchased inputs, less money spent in local economy Competitive Advantage Returns to intensive management, niche market differentiation Returns to quality differentiation, localized networks Returns to extensive management, technical and scale efficiency Potential for Regional Economic Spillovers Larger labor income and local expenditure may expand farm labor household income and support local businesses Larger local inputs and labor costs may expand multipliers to households and enterprises Margins may be slim and expenditures may be spent outside region, but volumes of sales are high Community Development Implications Enhanced linkages between farmers and consumers generate social and political capital Expanded opportunities for entrepreneurship, regional identity/branding Larger farms garner political capital; high volume allows linked businesses to operate at capacity

29 Case Study Guide for Authors Table 9. Broad guidelines for case study template for food value chains Key Data for Economic Viability Analysis Enterprise Business Scope, Size and Organizational Factors Competitive Advantage Essential Elements Name, revenues, product/service portfolio, employees, legal structure, governance model, year of establishment Market orientation, Differentiation scheme, Key alliances, networks and partners, scale relative to industry average Gross margin, net income, asset value, debt level (or ratio), labor expenditures, portfolio shares of key product lines Sales attributed to partners/alliances, financial ratios benchmarked to industry averages Key Metrics for Wealth Creation Analysis Mission statement, commitments to community partners (environmental, cultural, political, education) Specific evidence of business alliances or partnerships that are aligned with mission or strategic position Marketing Strategy, Channels and Pricing Strategies Number of market channels, share through major channels, relative price points (broadly defined) Price premia (actual or goals with specific number for key products), Returns to promotions or differentiation strategies Sales driven by key partners or alliances, Share of sales pledged to community orgs, Price discounts or allowances for allied businesses Sustainability and/or Growth Strategy Intended expansion in geographic markets (vendors or markets), New initiatives to differentiate product lines or coordinate in new market channels Year over year sales growth, Planned investments in capital or workforce, Payback period expectations on market expansion plans or investments Evidence that linkages generate specific social & political capital (lower transaction costs, access to new markets, favorable zoning) Challenges and Potential Threats Number of new competitors, regulatory compliance issues, loss of market channels/partners, cost pressures Evidence of lower prices or margins, cost inflation, estimates of costs to comply with regulations (food safety, liability, environmental impacts Negative spillovers. Unintended over competition from proliferation in certain regions. Regulatory scrutiny (food safety or zoning concerns)