Connect with customers when you’re not there
This article originally appeared in the January 2020 issue of Growing for Market Magazine.
Wholesaling is a topic that’s garnered a lot of buzz in farm business planning circles over the last half decade or so. A whole range of my farm clients have expressed an interest in exploring wholesaling as a marketing strategy.
These include farms who have built successful businesses direct marketing, but are burning out on the three-farmers-markets-and-two-CSA-dropsites-at-a-time routine; new farmers who are trying to make their way in a marketplace where the direct marketing options are somewhat saturated; and farm families with a history of growing one or two commodities who are trying to figure out how to do something new in the face of a declining market for their traditional products.
Interest in wholesaling has trickled upward into the farm investment community too; now there are many nonprofits, state agencies, and community banks with programs aimed at helping farmers evaluate wholesaling.
If you’re considering wholesaling as a marketing option, or if you already wholesale and are considering expansion, this article highlights some of the main considerations you might want to take into account.
The importance of finding a niche
Before I go any further, I should define what I mean by wholesaling. The definition I use is somewhat loose: wholesaling is selling a product to anyone other than the end consumer who is actually going to cook and eat that product (or share it with friends and family). So, this could be direct to a store or restaurant, or to distributor or processor.
That’s a pretty broad definition, so I typically divide wholesaling into two types: commodity wholesaling and branded or niche wholesaling.
Commodity wholesaling involves producing a product to a grade or standard, then selling it into a distribution and processing network where it is usually blended with the same product from other farms, often processed further, then distributed to stores and foodservice businesses. By the time your food has reached the end user, it has no connection to the place or story from which it came.
Most farms that wholesale commodities focus on one or a very few products. Commodity wholesale farms are often very specialized and very efficient at producing whatever it is they produce. The market is usually so vast that finding a place to sell the commodity is usually not the problem; the problem is price.
Due to the dynamics of supply and demand, farmers usually have little to no leverage in determining the price they receive for a commodity; they are price takers. In order to maintain their profit margin, a farm must either invest in equipment and production practices to get more efficient, or increase their size, or both.
Over time, this drives most farms out of the market for a particular commodity while leaving behind fewer, larger farms. For instance, in Maine, within living memory, this has happened with potatoes, dairy, and wild blueberries.
Branded wholesaling, on the other hand, focuses on developing a product with specific qualities and a specific brand or story that the end consumer recognizes. It is a form of niche marketing. Most of the farms I work with are interested in some form of branded marketing. And it’s the type of wholesale marketing I usually recommend, so it’s the type I’m going to be focusing on for the rest of this article.
To be successful, a branded wholesaler must understand who he or she is trying to reach at the other end of the supply chain, and why they would care enough to purchase a branded product over a commodity alternative. I cannot overstress how key this understanding is to a successful branded wholesale product.
Branded wholesalers tend to be able to negotiate price more readily; on the other hand, if their product is calibrated to too small a niche, they may have trouble moving the volume they need. Branded wholesaling is also a lot more labor intensive; it usually requires heavy investments in developing customer relationships.
Sometimes, I like to explain the difference between commodity and branded wholesaling using a metaphor from ecology. In ecology classes, the concept of a niche is often explained using the example of spruce trees and warblers. The yellow-rumped warbler is a larger species of bird that feeds on insects and berries around the base and interior branches of spruce trees.
While yellow-rumped warblers are numerous and impressive, they aren’t able to reach the upper branches of trees like their lighter weight cousins, the Cape May warblers. In other words, the Cape May warbler has a niche that the yellow-rumped warbler can’t reach as well.
Branded wholesale marketing is like that: find a niche that the big birds can’t reach as well as you can and develop it.
Advantages of wholesaling
Wholesaling brings with it many advantages. Here are some of the major ones that I’ve seen and experienced:
Focus on fewer crops. Typically, farms that wholesale tend to focus on a smaller range of crops than those who direct market. Often, diversified farms feel a need to round out their market displays or CSA boxes with a full diversity of crops. This can lead to the farm growing 50 or more crops.
On the other hand, most wholesale-focused farms tend to rely on ten or fewer crops for 90% of their income. This enables the farm to streamline production, making their days less hectic and scattered, and concentrate on making sure the crops they do grow get the care and attention they need to be of highest quality.
Higher, more predictable volumes. Wholesaling tends to generate higher, more predictable sales volumes of specific crops. This makes it easier to plan plantings and ensure that less is left in the field unharvested. The level of predictability varies, however, depending on the types of customers you wholesale to. For instance, farmers who sell to chefs tend to find that their orders are less predictable than those who sell to stores.
Less time spent direct marketing. One of the major reasons that many farms get into wholesaling is farmers market or CSA burnout. They get tired of getting up at three a.m. three times a week to go to market, then returning home to full day of work on the farm (who wouldn’t, eventually?). Or they get tired of packing hundreds of CSA boxes and handling dozens of emails about changes/switches/out of town notices every week.
Wholesaling can be an attractive alternative in that it reduces the amount of time devoted to sales every week. For instance, on our own vegetable farm, my wife and I wholesale most of what we grow to local stores and restaurants. We do this in part so we can spend most of our weekends with our four boys, instead of transporting produce around to various markets.
However, sometimes it is a misconception that wholesaling eliminates the need to do sales work. This is not true, especially for brand-focused farms who need to be constantly enhancing and developing relationships with their wholesale buyers in order to succeed. But generally, it does mean fewer 3 a.m. market mornings and email inboxes stuffed with CSA change requests.
Higher quality of life. Fewer crops to juggle, more streamlined production methods, and fewer direct market relationships to manage can add up to fewer, less hectic hours - which means a higher quality of life for many farmers. This, more than any increase in profits, is how the farms I work with describe the benefits of focusing on wholesaling.
Disadvantages/risks of wholesaling
While a focus on wholesaling does provide many benefits, it also brings its share of risks and pitfalls as well. Here are some of the most common ones:
Less diversification/more risk. While specializing in fewer crops can mean greater efficiency, it also makes the farm’s bottom line much more susceptible to the market fluctuations or failures of a single crop. There is an inherent tradeoff between the efficiency of specialization and the resiliency of diversification. Where is the perfect balance? It varies from farm to farm.
One way to measure your farm’s resiliency is to “stress test” your budget: make a full cash flow forecast, then remove the income from your top 3 crops while keeping the expenses the same. Are you still solvent? If not, then you may need to be slightly more diversified.
Conveying your brand effectively at a distance. In marketing parlance, “Your brand is who you are; marketing is what you do.” Branding is very, very important; some marketing experts such as Simon Sinek believe that nearly 100% of a customer’s purchase decisions are made based on their alignment with your vision, beliefs, and values.
When you are a direct market farm, conveying your brand is relatively simple; you are your brand. Customers know you personally, and they buy things from you because they believe in and trust you. Once you start wholesaling, however, you remove yourself from direct contact with your end customers, and they know longer know you personally.
You have to develop promotional proxies to tell your brand’s story, such as improved packaging and social media presence. These investments can be costly, but if you don’t make them, you won’t be a successful niche marketer.
Lower pricing. When you market directly to a customer, you capture 100% of their purchase dollars. The further back you move in the supply chain, the less of that money you capture.
For the vast majority of crop growers who sell directly to a store, the “50% markdown” rule applies; to estimate the price paid to you, note the retail price the store is charging for a comparable product and divide by 1.5. If you are working with a distributor who is selling to a store, then mark that down to half the retail price.
Keys to success
Wholesaling can yield many positive benefits to your quality of life, and sometimes your bottom line, but it entails new risks and challenges as well. Here are some of the practices that most of the successful wholesale farms I work with share in common:
Know your unit cost. Your unit cost is your cost to produce one unit of any given crop - a bunch of beets for instance, or a pound of carrots. A unit cost calculation includes both the direct labor and input costs that go into growing a crop, as well an allocation of your farm’s overhead, capital replacement, and owner’s profit costs.
This makes your unit cost the “price you need to pay all of your expenses and yourself.” The calculation for a unit is deceptively simple; take all the costs associated with a crop and divide it by the yields associated with the crop, and you’ve calculated your “cost per unit.”
If your farm grows only one crop, that’s easy to do. If you grow a complex diversity of crops, then parsing out which costs go with which crops is difficult. Here’s an outline of how the process works:
Calculate your direct labor and input costs associated with a crop using an enterprise budget template from your Extension service, Richard Wiswall’s The Organic Farmer’s Business Handbook, etc. Break these down to a “per bedfoot” or “per acre” basis (whichever unit you’re more comfortable with using).
Reconcile your actual labor costs to those in your enterprise budgets. This part is tricky but crucial, because there is usually a fair amount of “silent” or “in between” labor costs that aren’t reflected in the enterprise budgets, but which need to be borne by your crops. This usually involves adding up all the labor hours you THINK you spent on your crops based on your enterprise budgets, then dividing your ACTUAL payroll costs by those hours to create an average labor rate that includes an allocation of “indirect” or “silent” labor.
Add up all your farm overhead, capital replacement (usually either depreciation or loan principal payments, whichever is higher), and owner’s profit costs, then divide them by the total number of acres or bedfeet (whichever you prefer) for ALL the crops on your farm. Add this to the direct costs you’ve already calculated.
Divide these costs per bedfoot by the net yield you sell per bedfoot of the crop.
Accurately predict sales and plan production accordingly. Sometimes, a crop can look profitable on paper - but if the farm overplants and ends up sinking a whole bunch of input and labor cost (not to mention wasted space) into a crop, then the numbers can look bad very quickly. Underplanting can be problematic too; if you run out too early, your customers may switch to someone else and never return. Here’s my general rule of thumb for production planning:
Divide your anticipated sales by your yield per bedfoot to figure out how much to plant.
Add 10-15% to this number.
Pay attention to seasonal changes in demand and adjust succession plantings accordingly.
Price at just the right sell through rate. Pricing is a two-part strategy. It starts with knowing your unit cost; this is your price floor, which you can’t go below for too long without exploiting yourself (read: burning out). On the other hand, if you only price at your unit cost, and then sell out of your crop before your availability window closes, you’re missing out on the easiest money possible - the profit you can earn just from increasing prices.
Here’s a general pricing rule of thumb: using your unit cost as your price “floor,” raise your price until you are just selling out of your available inventory. The more specific and loyal a niche you have, the easier this is to do.
Invest in packaging. Almost every wholesale farm I’ve ever worked with who invested in packaging told me later that it was one of the best investments they made. This is because packaging makes customers happy. Wholesale buyers love packaging that is sturdy, clearly labeled, ergonomic, and easy to stack; whenever I ask a wholesale buyer what they want from a local supplier, “sturdy, consistent packaging” is almost always in the top three.
At the end consumer level, retail packaging adds a level of convenience that many customers prefer; more and more products everywhere are moving from the bulk bin into retail packs. And packaging is your best opportunity to tell your brand’s story to the end consumer.
Packaging can be costly, but generally, it seems to me that farms who invest in packaging are able to mark their prices up above the additional packaging cost. The value of convenience and storytelling is worth more to the end consumer than the increase in price.
Of course, packaging does add to the waste stream, and this does upset certain types of consumers, so be careful to know your segment before you invest. Though there are many types of recyclable or compostable packaging now being developed as well.
Be consistent. Successful wholesale farms deliver what they say they will deliver, to the quality standard they maintain, nearly 100% of the time. This means feeling confident enough in your production techniques to be able to provide this consistency. Wholesale buyers get very frustrated by inconsistency - it only takes a few no shows, different pack sizes, or half-fulfilled orders before they may find someone else. Natural food stores tend to be more forgiving in this way than other types of stores, but everyone has their limits.
Good farm-to-buyer-communication. A business mentor once told me, “At the end of the day, people buy things from people they like.” This is certainly true of farming for wholesale; you will need to plan on investing substantial amounts of time in developing and maintaining close relationships with your wholesale buyers. This includes year-round communication, not just in-season sales calls. Here are some important parts of healthy farm-to-buyer communication:
Winter planning meetings. Meet with your major wholesale customers at least once in the off season. Bring two copies of your sales report (Quickbooks or other) of the crops, quantities, and prices you sold to that customer last year; discuss what changes might happen for the coming year. Review your logistics of taking and fulfilling orders to see if your customer wants any changes.
Asking lots of open-ended questions, and being ready to listen, are important aspects of these meetings. Immediately after the meeting, send the buyer a thank-you note where you confirm with them the crops, volumes, prices and timing you anticipate. There is usually nothing binding about these notes; they are meant to establish a mutual relationship of good faith.
Updates. Send your buyers updates of your crop(s) as they are growing. This helps to keep you in their minds. It is especially important to notify your buyer of a crop’s imminent availability; they will need to clear out inventory of something else in order to make room for you. Also, if a crop is not performing as well as expected, notify the buyer as soon as you are sure you will be short. Bad news is best delivered early - they will appreciate and remember your honesty.
Agreed upon processes for communication and shipment. Make sure you have a written understanding of the logistics of sales and order fulfillment with your buyer. Who initiates contact? When? How - text, email, phone, fax? How and when are orders confirmed? How and when are they delivered? Where do invoices get checked and submitted? Usually, these details are determined at the convenience of your buyer, but sometimes they may ask for your input.
In conclusion, wholesale marketing can be a good way for a farm to reduce their direct marketing labor, improve their quality of life, and sometimes improve their bottom line - but it brings with it a host of new risks and challenges as well. If I were to summarize the common themes I see amongst successful wholesale farms, they would be:
Know what your niche is - who are your end customers, what makes them and you different from the other “big birds” in the market? Price, promote, and package accordingly.
Know your unit cost and be confident in your ability to produce consistently.
Make your wholesale buyers like you by engaging in healthy farm-to-buyer communication.
Jed Beach is a farm business consultant and organic vegetable farmer in Lincolnville, Maine. He and his wife operate 3 Bug Farm, where they wholesale greens, herbs and other crops to stores and restaurants. Jed provides business planning services and crop profitability assessments to farmers through his practice, FarmSmart. More information can be found at farmsmartmaine.com.