Hello folks, thanks for joining us for this rural food and farm entrepreneurship video series. My name is Andy Larsen, and I’m a farm finance consultant with the Food Finance Institute and Wisconsin’s Small Business Development Centers. We’re part of the Institute for Business and Entrepreneurship within the University of Wisconsin System. Thanks very much to my collaborators at University of Wisconsin Division ofExtension for making all this possible. 

Today, we’re going to talk about choosing a market channel and market channel is simply the methodology through which you bring your home or farm produced food product to market, you reach the customers that are ultimately going to be the ones either eating or reselling the food that you have produced. There’s quite a variety of different market channels that you could consider, but I’m going to divide it up into two basic buckets. First one being business to consumer often shortened as b2c. So I’m gonna talk about four different channels selling from home, selling from the farmers market, a food truck, and an online storefront, or b2b or business to business. We’ll talk briefly about retail stores, restaurants, food hubs, and wholesale sales. So no matter which market channels you’re considering, you’re always going to have to remember to decide whether or not you can actually make a profit in that market channel. 

Now there’s two big things that you’re going to need to consider when making this examination, one is going to be your cost of production, or cost of goods sold, are the prices good enough to cover your variable costs that increase or decrease directly with the volume of product you produce. When we’re thinking about this from a food or farm perspective, we’re usually thinking about variable costs like seed or feed or inputs, product packaging, ingredients, that kind of thing. The other main cost that you’re going to have to think about market channels by market channels is the selling costs or transaction costs that are incurred just to make sales happen. Think about delivering product, paying for shipping, booth fees, and things like a farmers market or credit card fees to make a transaction actually go through. 

So let’s begin our examination of market channels with the b2c or business to consumer bucket. These are the ones where you’re going to be selling your food or farm product directly to the humans that are going to be preparing it at home and putting it in their faces. 

So let’s begin our examination of the b2c channels with the at home or on farm stand. This is one where a lot of food and farm entrepreneurs tend to default too early on simply because it doesn’t require them to go anywhere, and it fits into the busy lifestyle of a farmer or a food producer. There are some major benefits to this. Obviously, convenience for the producer is a big benefit. Having the sales take place on the farm prevents you from having to travel someplace else in order to get these transactions done. The other thing that’s nice is it starts right from the get-go training your customers to come to you, which is a real benefit from the point of the producer. However, it’s not necessarily a convenience from the point of view of the customer. Unless you live on a well traveled road that’s very convenient to you know places of population, it’s likely an inconvenience to come out to your farm or to your home in order to pick up the food or farm product that you produce. Most of the time, you’re going to have a parking issue. Even in rural areas, you’re gonna have people parking on the grass, which isn’t going to be good during wet periods and urban areas, you might have space constraints about where people can park.  Staffing can be hard because especially if this is outside of your home in a farm stand or another retail store in a separate building. Having a person out there to receive customers all the time might be difficult unless you actually are hiring personnel.

Payment methods can get a little complicated. A lot of people are cashless nowadays. And if they want to come out to your farm stand and buy something, you’re going to have to provide a digital means of being able to produce a transaction either through credit card or a tap with the phone or something like that. So those payment methods are going to have to get figured out and whether you’re doing something as simple as an honor box on a sweet corn stand or a full fledged cash register in a separate retail building, you’re going to have to think about security. How are you going to keep those funds secure when no one is actually staffing the building?

Last but not least, do please consider municipal rules. different municipalities have different zoning requirements about what you can use as far as materials and size for a home based business or a farm stand. They’re usually trying to keep a certain kind of appearance of the neighborhood or the municipality. 

Another place a lot of rural food and farm entrepreneurs tend to begin is the farmers market. It’s one of those places that has really low barriers to entry. It’s relatively inexpensive. There’s not a lot of infrastructure or equipment you have to buy with the exception of maybe some coolers or crates or tables or things like that, you get great local exposure, it’s usually a popular destination amongst foodie types in the area. And you get the awareness of that particular crowd, as well as some of the local chefs who like to focus local foods bought from the farmer’s market in order to feature at the restaurant, things like that. It’s also a really wonderful place to do primary market research, you may think you have a specific suite of characteristics or benefits that are the most attractive to your consuming populace. But this is a place to confirm or disconfirm those suspicions on your part and figure out what your customers really do want. 

On the challengers side, farmers markets are time intensive. And so even though the fold money is nice, if you really account for all the hours you spend, prepping, standing there setting up, taking down, throwing away anything that you know, spoiled while it was there, they oftentimes are not going to pay for themselves from a time standpoint. There are bad weather days, which tend to drastically reduce foot traffic, which is also going to drastically reduce your take for the day. There are a number of customers that come to farmers markets simply for the experience, and not really to buy. I’m just referring to them as quote unquote “tourists” here. They want to bring their dog, they want to get a coffee, they want to see what the local foodie scene looks like. But they’re not really preparing or prepared to buy anything off of you when they get there. There’s always going to be inherent competition, both for pricing and for quality, because it’s going to be similar farmers at a similar point in their career trajectory. Pricing can get problematic, especially if there are folks who are not necessarily trying to make part of their living from the farmers market, if they’re just there for funsies. And they don’t really have to charge anything, they might undercut some of the other vendors who are actually trying to make a living there. Last but not least, every farmers market is a little bit different regarding what you can carry. Whether or not you’re allowed to do non food items, whether you’re allowed to sell items that you didn’t produce yourself. So you have to look really closely at the rules of both the specific farmers market and the municipality in which it’s located. 

Food trucks have grown in popularity in recent years for a number of reasons. One is that they are relatively low cost at least compared to a restaurant, you don’t have that overhead, you don’t have a mortgage for bricks and mortar building, you have lower staffing concerns with only one or two people that can fit in the back of that thing. You have flexibility, you can go where the action is, and hopefully go where the paying customers are, and of course visibility.  You essentially have a box truck where the sides of which are a rolling billboard, so you can get some really good awareness built just by driving the thing around town. 

Some challenges include space constraints, there’s not going to be a lot of room for a lot of people or a lot of inventory in the back of a food truck. Oftentimes people are having to do some preliminary prep work in a commissary kitchen or some other licensed facility like that. And just carrying as much as they can sell that that evening or that day at their event in the food truck. Weather, it’s going to be a problem for food trucks, just like it would be for farmers markets if you’re not providing a covered place to eat. The predictability is difficult, because food trucks can be anywhere they often are. And so unless there’s someone locally that’s doing sort of a food truck roundup or some kind of digital awareness campaign of where food trucks are going to be it may be hard to find your favorite restaurant for her that day.

 There are municipal rules about what and where you can sell what and where you can park what and what kind of noise you can produce with a generator or anything like that. So you have to be well aware of those things and talk to some other food truck participants and vendors. Last but not least, you are going to be subjected to the vagaries of fuel prices just to get around, but also to provide your unit power in between stops.

Especially after the pandemic, a lot of people are starting to consider online stores. The benefits include the fact that anybody can do it. The technology is user friendly enough nowadays that most people with at least a little bit of digital and web savvy can put up their own online store using some platform that’s available nowadays. And you can attract customers from absolutely anywhere. But the problem is that anybody can do it and you attract customers from anywhere. So you always have all the competition, you’re out there against all the established brands and all the newbies that are positioning themselves to come into the market soon. And the customers are going to be inundated with the amount of options that they’ve got out there online. You have to figure out what it is that makes you stand out from all the other competitors that are there. The other thing you’re going to have to learn about very quickly is how to fulfill orders and the logistics around that the shipping, the delivery, the picking up at a central location, whatever it is, you’re going to have to have a great way in order to make sure you can get whatever you’re selling into the hands of the person that’s buying it. 

Transparency can be an issue with these. Because you’re online and someone doesn’t necessarily see your farm. So your practices whatever, there can be a lot of reselling going on a lot of disingenuous practices. So you’re gonna have to work hard to make your own transparency in an online environment. There are platform costs, especially if you’re using someone else’s online store, think Amazon or other places like that. Some of them take a pretty substantial portion of your revenues and leave pretty narrow profit margins. Last but not least, if you’re not a highly technical person yourself, when you do run into technical difficulties with your online store, you’re going to be at the mercy of someone else’s calendar in order to get the thing fixed up and running again.

 Real quick, let’s start thinking about some of the b2b or business to business market channels. These are the ones where you’re selling to an intermediary, that’s going to be doing some kind of manufacturing, cooking or reselling stuff in order to get your food in the consumers face. 

A lot of local food and farm producers are starting to think about retail stores as a potential market channel. And when I’m talking about retail stores, I’m generally thinking about the local independent retailer as to the larger order retail chain, some of the benefits include being able to bring a higher quantity of product, deliver it, and even put it out there on the shelf in less time than it would take to say stand at a farmers market. Also, you’re probably going to attract a larger proportion of the local customer base than you otherwise might by going into a you know different town for a farmers market or whatever. These are people that are going to be coming every day of the week in order to buy food. The challenges start to scale up pretty quickly as the scale of the store scales up. Inventory Management can get complicated, most small scale food and farm entrepreneurs don’t have a fancy EDI system so they know where their inventory stands and when they need to restock. If you’re going to do anything that is cooked or manufactured, you might have labeling requirements in order to stay legal in a retail setting, you’ll be able you’ll need to be able to comply with their checkout process, which sometimes is going to mean having a UPC symbol on the packaging of whatever it is that you’re selling if it’s not sort of a fresh commodity product. And last but not least, you’re going to be competing with other existing products in your retail space, and you’re going to be able to, you’re going to need to be able to compete with the sales velocity the amount of product that moves in a particular period of time, because that’s the way that a store makes money is moving more product with a little bit of margin. So you have to consider how your customer profits as well. 

Local restaurants that feature local food are also going to be a popular destination for small scale food and farm entrepreneurs that are getting started. There are some definite benefits to working with these folks as customers, they’re going to be able to showcase your product probably in its finest format as well. So that’s a really nice thing as far as the wider perception, the public perception of your business and of your product. They’re also going to be able to provide constructive feedback about how your packaging worked, how the presentation worked, and how the overall quality fit into their mix. There are some challenges of course, just like with every other market channel, there is going to be variable demand depending on what the chef is featuring that particular week, depending on how often they change venues over. They might also be a more seasonal business depending on where in the country you are. 

Communications can get complicated. In my experience working with chefs most of the time, text messages are the way that they like to communicate, at least at this point in time.  That could change in the future. The other thing is that you’re going to find is that the staff at a particular restaurant doesn’t stay static for really long periods of time. The chef or the person who’s in charge of making the orders for your particular commodity might go on to a different restaurant, they might bring you with them they might not so that staff turnover is a concern for a local food and farm entrepreneur. 

As you start to scale up and production volume, you might start looking for some market channel solutions where you can move a larger quantity of product, even if it’s at sort of a lower percentage margin. Food hubs are a place that do local food aggregation and distribution. There are some great benefits to that, again, like a store, it’s higher quantity often and less time to deliver. They’re going to attract a larger swath of customers, there’s a likelihood at local retailers, local restaurant tours, and even some local end consumers will all work with a food hub in order to do for food orders. And so that provides some pretty great customer convenience to a lot of different market segments there. Some of the challenges that might happen with food hubs, there’s going to be seasonality with a food hub, just like there’s likely to be seasonality with the producers in the area. In all likelihood, there’s going to be some additional price sensitivity, because they have to be able to put a markup on the food in order to be able to get it to the next step in the value chain and still make their return on what it is they’re doing. There’s going to be a likelihood that they’re going to have to repack some of your product if you’re not delivering it in sort of professional grade packaging that could be an expense to you or to them. Oftentimes, these food hubs are supported with a mix of revenue grants, other programs. So this isn’t one of those things that is necessarily like a long lived permanent kind of institution. They do have a tendency to turn over staff; they do have a tendency to close down after particular programs are over. If you’ve got a food hub in your area that’s been around for a long period of time and really had the opportunity to perfect its practices, it’s likely that they’re going to be a nice high volume customer for the right farm. 

Sort of the penultimate market channels for the food producer is the wholesale market channel. And there are some benefits to that primarily being volume, you’re going to be in a large scale over a large distribution with some pretty substantial market penetration. So this takes some size in order to really work well.  The challenges, I mean, if you’re going to start out in wholesale, you’re going to need to be able to meet up with pallet quantity orders right from the word go. This is not going to be one of those things where people are ordering onesies and twosies in cases or quantities or it’s going to be too small, it’s going to need to be larger than that. You’re going to have money tied up in all likelihood, if you had if you’re not working with a co packer, you’re probably going to have equipment and infrastructure dollars tied up, you’re going to have inventory dollars tied up in all likelihood, you’ll have to do some kind of trade spend in order to do coupons or resources or other promotions early on in order to gain the market penetration that you want in the in the retail chains that you’re that you’re reaching.  You might need to have more than one product multiple skus is something that you know a retailer is going to like for the diversity and also to make sure that if one thing isn’t selling then another thing is. They’re going to be multi step supply chains and everyone along the supply chain is going to have to take their margin out of that price. So you’re going to have to plan to have pretty skinny margins to have pretty controlled costs in order to make sure that you could meet your target suggested retail price. And last but not least, when there’s that many hands handling something over the course of a supply chain, transparency can become kind of difficult. So if you want radical transparency about your production practices all the way to the end consumer, you’re going to have to work carefully in partnership with your aggregator and distributor to make that happen. 

So my takeaway messages on market channels are as follows. First, research market channels with people who definitely have a real firsthand working knowledge of that channel in order to get their real firsthand experience with how well or not well that it worked for them and their business. Secondly, you’ve got to make sure that that channel has profit potential for you. Considering both your production costs and the selling costs you’re going to have for the transactions for the delivery for the distribution, whatever else it takes in order to make sales happen. You’re going to have to choose market channels that fit your brand and also reach your target customer segment. You don’t want to be selling into a store that doesn’t meet your values. You don’t want to be trying to get it in front of customers who are not your likely consumers.

Last but not least, choose market channels that fit your business and don’t compromise your quality of life. If you hate talking to people or you hate standing in no parking lots for eight hours at a shot, you’re not going to want to use farmer’s markets. So just make sure that the things that you are selling into are also providing you opportunities to do sales tactics that you enjoy. 

If you’d like more information about developing a rural food or farm business, please drop by the Extension Farm Management page. In addition to all the financial tools and templates, you can click on the business development link and peruse a whole section on beginning farm and enterprise development. 

Or swing by edible alpha, which is where FFI the food Finance Institute keeps all of its archives of articles, podcasts, webinars, and a whole slew of food entrepreneurship topics. Once again, thanks for joining us for this rural entrepreneurship video series. I’m Andy Larsen with the Food Finance Institute and Wisconsin Small Business Development Centers. I look forward to seeing you again soon.