About the authors Avoiding “Sales Around the Hub” In speaking with hundreds of food hub managers around North America, we often hear about challenges with producers “selling around the hub”. Acquiring customers, developing relationships with producers, and learning how to best market and sell their products require considerable time and effort and so understandably, food hub managers are concerned when a producer circumvents the hub. For most hubs these relationships and know-­‐how are its most valuable asset and the transparency of its supply chain is the key differentiator from traditional distributors. So how does a food hub maintain transparency while also protecting its investment in that supply chain? We’ve broken down our analysis of this common issue, how to avoid it, best practices for food hub/producer agreements, and what to do when it happens. Why do producers “sell around the hub”? Amy McCann is LFM’s Co-­‐
founder and CEO. She acted as the producer liaison for the food hub she co-­‐
managed for 4 years. Ryan Crum is LFM’s Sales and Marketing Coordinator. He is a former chef and also worked as Marketing Manager for an organic grass fed dairy in the Midwest. Copyright © 2015 Local Food Marketplace, LLC It seems ludicrous that a producer would bypass a key supply chain partner that promotes the producer’s brand and pays them more and faster than other distributors. In our research, the situation is rarely so straightforward when viewed from the producer’s standpoint. Here is a summary of common themes we’ve heard in conversations with food hubs and producers: The hub has fallen short on meeting producer expectations. This most often occurs because the hub has overestimated sales volumes or has unclear or shifting producer requirements (e.g. payment terms, volume requirements, quality standards, pricing, and distribution). Producers inevitably become wary of the hub’s longevity because they are accustomed to a continuously shifting landscape of well intentioned, but temporary local food outlets. Many small producers undervalue the services offered by the food hub. Small producers don’t often track their sales and marketing costs, are used to charging retail prices for their products, and have very limited supply. The idea of the food hub helping them expand and streamline their sales sounds great in the abstract, but they balk when they realize the margin they must give up in order to enjoy the benefits of selling through the hub. If the producer has a limited amount of product to sell and can sell all of it to just a couple of customers, they may ultimately perceive the hub’s services as unnecessary. Hubs engage with producers that aren’t the right fit at the right time. Many food hubs attempt to serve all local food producers instead of taking a more strategic approach and selecting specific producers where the food hub and producer can mutually benefit. Food hubs are often looking for top quality product while some producers just need an outlet for their seconds. Unless the food hub has developed relationships with customers that want seconds, it is wise to hold off until either parties’ needs change. www.localfoodmarketplace.com [email protected] Avoiding “Sales Around the Hub” When faced with a producer selling around their hub for the first time, many hub managers immediately begin crafting a producer/food hub agreement. To maximize its effectiveness, an agreement should be in place before hub operations commence. Because it is such a critical tool in protecting the hub’s investment, we’ve included a separate section on best practices for food hub/producer agreements below. With the agreement acting as the cornerstone of a hub’s strategy for protecting its investment in acquiring customers, there are several other steps a food hub should take to reinforce the agreement and encourage compliance. Begin with the business plan. Clearly articulate the value the hub provides to customers and producers. How will it save producers time, money, and labor? How will it help them increase sales? What needs have producers expressed that will be fulfilled by the food hub? A clear value proposition and a realistic long-­‐range business plan show producers and customers that the food hub can be counted on into the future. An info-­‐graphic can be a powerful way to demonstrate a hub’s value in a succinct, easy to understand format. Select producers strategically. Develop a list of key producer attributes that represent a set of producers that will meet the food hubs needs and value the hub’s services. Some attributes to consider include food safety certifications, scale, available products and grades, and infrastructure. Many hubs select a mix of producers by size and experience with larger, more experienced producers acting as “anchor” suppliers. Infographic for Iowa Food Hub by Inspire(d) Media Engage with producers before conducting business with them. Having in-­‐
depth conversations with producers at the outset will set the stage for a successful partnership. It will also reinforce the hub’s expectation for open discussion about conflicts and concerns. In these meetings, hub managers should aim to discuss foreseeable challenges and ensure there is mutual understanding of how these will be managed. Here are some recommended discussion topics: o
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Copyright © 2015 Local Food Marketplace, LLC Target customer overlap. Determine how to approach overlapping customers in the short term and long term. Pricing strategies. If the hub uses a transparent pricing strategy, explain how customer prices will be determined so there are no surprises. Sales around the hub. Over time, a producer will inevitably have the choice to sell through the hub or around it. What factors do they consider in making the decision? Having this discussion upfront will help managers know what to expect from the producer. Quality and food safety issues. Understand the producer’s experience in selling to the type of customers the hub is aiming for. How do they manage the need to provide continuous supply? What food safety practices and certifications are in place? www.localfoodmarketplace.com [email protected] Resources for production planning Production Planning for Aggregators by Value Chain Cluster Initiative and Leopold Center Getting Started with Production Planning, Production Planning for Food Hubs Part 1 and Part 2 by Local Food Marketplace Develop a production plan with producers and customers. Many producer/food hub relationships go sideways because of a lack of planning. When hubs engage in production planning, they not only create shared volume and price expectations, but also make themselves more valuable (and difficult to replace) in the supply chain. Analyze risks for each party and implement creative solutions. Small producers that commit a significant amount of their overall supply to the hub assume greater risk than a larger producer that commits the same volume. Some food hubs, such as Intervale Food Hub, provide partial upfront payment to reduce risk for smaller producers. “Seconds” customers will also mitigate risk for inexperienced producers that miss the quality mark their first season. Adopt a continual improvement process. Be proactive in finding ways the hub can increase its value in the supply chain. If producers see evidence of continual improvement and expansion of services, they will get the message that the hub is committed to the mutual benefit of both parties. Protect the hub’s intellectual property. For many hubs, intellectual property constitutes a majority of its assets. A hub’s intellectual property includes its brand, logo, producer and customer lists, production plans, revenue forecasts, pricing strategies and more. Putting internal procedures and agreements in place to prevent losing control of these assets is critical in preserving the hub’s value. Create a hub brand. Some hubs develop and emphasize their own brand to increase customer loyalty to the hub. Food hubs that have used this strategy include Red Tomato with their Eco Fruit brand and Organically Grown Company with their Ladybug brand. Key aspects of a producer/food hub agreement Writing an agreement doesn’t have to be a daunting task. As a starting point, we’ve compiled a set of best practices. Hub managers should avoid the temptation to simply adopt another hub’s producer agreement for efficiency. Reviewing samples of other food hub and wholesale distribution agreements can be helpful to generate ideas, but they are unlikely to reflect the exact needs of another hub. The process of developing the agreement is valuable in creating clarity and unity within the hub team. The agreement should reflect discussions the hub and producer have already had. Trust and communication are critical in the food hub/producer relationship and presenting key requirements for the first time in the written agreement will compromise the hub’s efforts to bring the producer on board. The agreement should be easily understood by a layperson. Nothing will scare a producer off faster than a document full of legalese. Copyright © 2015 Local Food Marketplace, LLC www.localfoodmarketplace.com [email protected] Make sure that the agreement is not one-­‐sided. The agreement should cover both parties’ interests and should take into account the risks each party is undertaking. Work with several producers in drafting the agreement and incorporate their input. Use the agreement to identify key deliverables for each party. For food hubs they might include: payment terms, pricing, and volumes. For producers they might include: quality requirements, food safety certifications, minimum volume commitments, and growing practices. Hubs with seniority or performance based producer ranking systems should clearly describe their priority system. The agreement should cover predictable and common issues. Valuable resources on food hub/producer agreements Intervale Food Hub’s Producer Manual Legal Tools for Food Hubs, Part 1: Intellectual Property by Food Law Firm Legal Tools for Food Hubs, Part 2: Contracts Are Not Evil by Food Law Firm Food Hubs: A Producer's Guide by ATTRA Copyright © 2015 Local Food Marketplace, LLC Quality issues. How will the food hub deal with product that doesn’t meet quality requirements? Market based price changes. How will the food hub and producer manage unexpected price fluctuations? Depending on the hub’s scale, many hub managers have a process to work with producers on market-­‐based price adjustments so the hub can remain competitive. Volume/supply issues. What happens if the food hub can’t sell the expected volume? What happens if the producer doesn’t deliver the expected volume? New business. The agreement should cover how new business is acquired. How will producers handle new direct inquiries from customers in the target market? Does the hub have any exclusive distribution rights for the producer’s products? Be specific about expectations. Expect producers to actively support the agreement on their website and m arketing materials. Customer contact. While many producers will know which customers are purchasing their products, the agreement should specify what instances (if any) the producer may contact the customer directly. The hub should request to be copied on any such communication. Agreement breach. The agreement should include the process for how breaches will be managed. Be sure to provide some flexibility so that the hub can deal with each situation appropriately instead of following a rigid process. Update the agreement annually. Build in a plan to make revisions, especially those based on producer feedback. Remember that the agreement will need to shift over time as the food hub grows. Many hubs require their producers to sign the agreement each year to ensure there is opportunity to bring up new concerns. Review the document with producers. If the document is simply a formality, producers are more likely to ignore it. Consider meeting producers to review the document in person the first time they sign it so they have an opportunity to ask questions and bring up concerns. www.localfoodmarketplace.com [email protected] What to do when the agreement isn’t honored If a producer begins selling around the hub, think of it as a learning opportunity for the hub and the producer. Despite having signed an agreement, some producers may not think their situation applies. It is vital hub managers gather information about how and why it happened and deal with the problem immediately. This will send the message that it won’t be tolerated or overlooked. Here are some suggestions for how to approach a producer that has “sold around the hub”: Refer to the agreement first and discuss options with the producer. Does it adequately cover the situation? Having an open discussion about the circumstances shows that the food hub is interested in the partnership and wants to work with the producer to solve the underlying issue. If the transgression is purposeful or avoidable, determine whether the relationship is serving both parties. If it isn’t, don’t be afraid to sever the agreement immediately. Be sure to document what happened. Record keeping will streamline future iterations of the agreement. Summary “Selling around the hub” is a symptom of the uncertain, risky terrain local food producers must navigate while scraping by on razor thin margins. Understanding the underlying reasons for this common issue and putting systems in place to support producers is vital to the long-­‐term growth and success of the hub. Even though food hub supply chains are transparent, they can (and should) be protected. Doing so will allow hubs to more effectively meets their missions and continue to provide service to their customers and producers. LFM offers the most comprehensive, robust producer interface on the market. Delight your producers with automated pick lists, printable labels, and intelligence at their fingertips. Copyright © 2015 Local Food Marketplace, LLC www.localfoodmarketplace.com [email protected]