Data Dive Explores Financials at Wholesale End of Local Food Business

Arlington, Va., July 14, 2015 /3BL Media/ - New financial data from the emerging local food sector provides an in-depth look at the growth—and growing pains—of wholesale intermediaries called food hubs. These social enterprises combine food aggregation/distribution business services with programs that strengthen farmer capacity to supply nearby markets such as restaurants, grocery stores, schools, universities and hospitals.

The COUNTING VALUES: Food Hub Financial Benchmarking Study draws on financial and operational data from 48 of the more than 300 regional food hubs in the nation. The analysis uses an established benchmarking practice for comparing results within particular sectors to develop baseline performance measures.

Initially envisioned as a planning tool for hubs to benchmark their business performance against industry peers and find areas in need of improvement, COUNTING VALUES is taking on an additional larger purpose. Based on their review of preliminary findings, philanthropies, investors and lenders recognize the study’s wealth of data as a starting point to guide the flow of capital into the new local food sector.

Almost half of all hubs are less than five years old. During this time, many experienced double digit annual growth rates. More key findings below.

TOOL FOR MANAGERS, SUPPLIERS AND INVESTORS

“This study provides the first set of financial and operational performance benchmarks in a business sector that suffers from a lack of data,” Counting Values’ lead author Erin Pirro says. She is a farm business consultant with Farm Credit East, a Connecticut-based lender serving New England.

“This comparative data is intended for food hub management,” Pirro says. “It can also be useful to farmers and food producers as well as lenders, investors, and grant makers. All need to understand where the risks are for each stage in the value chain and for the sector as a whole.”

The financial benchmarks are designed to help food hub operators generate sufficient revenue to achieve economic sustainability. Pirro contends only profitable enterprises will be in a position to also achieve hubs’ unique social change goals.

One participating hub is Firsthand Foods—a sustainable meat marketing/distribution company that connects a supply network of 60+ North Carolina farmers with a customer base consisting mainly of restaurants, institutions and retail grocery co-ops. Last year, the Durham, NC-based company generated $1.25 million in sales. Last February, the company reached breakeven point for the first time.

Co-CEO Tina Prevatte says study findings show that Firsthand Foods is in a similar place as so many of the other start-up hubs around the country. “This study provides useful metrics that will allow us to more effectively track our progress in a brand new industry. We’re building something that is different from the traditional food industry. Slim margins and operating near breakeven are actually signs of success when your intention is to make good food accessible to all while also paying farmers fairly and equitably.”

FORWARD STEP FOR LOCAL FOOD MOVEMENT

The availability of this new sector-wide performance data may appear to be a mundane development. However, Counting Values represents a significant advance in the business of moving local food into high-volume sales channels.

“When we started almost seven years ago, we were hard pressed to find anybody willing to share numbers or intelligence,” recalls Haile Johnston, co-founder and co-director of Common Market. This year, the Philadelphia-based non-profit hub expects to generate $3 million in sales by supplying 250 customers—including 20 hospitals and 90 schools—with products from 85 Delaware Valley farms.

The lack of reliable data has impeded local food sector investment, says Kate Danaher, lending manager with RSF Social Finance. This three-decade-old, San Francisco-based financial services organization makes investments, loans and grants to non-profit and for-profit enterprises—including more than $5 million in loans to 11 hubs.

“Over time RSF expects this study to act like a compass – a true north of sorts— revealing the operational trends that will validate an organization’s business model and path to self-sufficiency,” Danaher explains. “For funders, these trends will inform how we choose to support and capitalize this movement.”

The United States Department of Agriculture also recognizes the strategic importance of hubs in the growth and development of the wholesale end of the local food business. On Wednesday July 15, USDA is releasing Running A Food Hub: Lessons Learned from the Field, the first in a series of technical reports to help food hubs plan for success, address challenges and achieve viability.

NATIONAL GOOD FOOD NETWORK

Counting Values is a joint product of the Wallace Center at Winrock International and Farm Credit. The Wallace Center is a Virginia-based non-profit that hosts the National Good Food Network (NGFN), a learning community of individuals and organizations pursuing market-based approaches to a more sustainable and equitable food and farm sector. NGFN partner Farm Credit is a nationwide network of locally-owned lenders to rural communities and agriculture. Farm Credit has a specific focus on helping young, beginning and small producers, who are vital to the economic health of agriculture and rural industries.

Walmart Foundation support for the study builds on investments that other funders, such as theSurdna Foundation and the U.S. Department of Agriculture, have made in the Wallace Center’s work to support regional food system development.

Wallace Center director John Fisk says: “Counting Values is designed to help values-based food businesses improve their operations and be more financially viable as well as helping capital flow. It offers a starting point to better assess different enterprises throughout the entire food value chain. This type of research needs to be continued over time, at the same level of detail, to support overall growth and impact of the good food sector.”

Surdna Foundation president Phil Henderson says: “Ensuring that low wealth communities and communities of color are co-architects in improving their access to healthy regional food is critical to sustainability. A sector wide financial analysis of how food enterprises are striking a balance between profit and social change can serve as a valuable resource to local lenders interested in food hubs and other models as solutions for their communities.”

KEY FINDINGS

Counting Values found that some higher capacity, experienced, and direct-to-consumer food hubs are achieving profitability, but that most participating food hubs have not reached the breakeven point. The study did not analyze food hubs’ other economic, social, and environmental performance. Most have entered the wholesale business as a means for achieving these other outcomes, and some seek philanthropic support for that part of their work.

PROFITABILITY: The highest performing 25 percent posted a 4 percent profit compared to the average of -2 percent. Within this relatively narrow spectrum, the most profitable food hubs were larger, older, and for-profit operations. Those with sales greater than $1.5 million averaged profits of 2 percent while food hubs between five and 10 years in operation averaged 1 percent profit. On average, for-profit food hubs earned a 1 percent profit compared to not-for-profit food hubs, which posted -7 percent before consideration of grant income or contributions.

EFFICIENCIES: The top 25 percent of hubs spent 39 percent more on labor (cost per worker equivalent). Those workers outperformed their peers by 56 percent (sales per worker equivalent). These factors can make a big difference in a thin margin business. The gross margin of the typical food hub in the study was 14.5 percent. That means only 14.5 cents of every sales dollar remained after selling the product to cover overhead or provide profit. Balancing profit margins with goals for an equitable food system is an ongoing challenge for some food hubs, which can be addressed in part with more efficient operations.

MANAGEMENT: Benchmarks’ true power is using data along with good management records to focus on improvements for the coming year. Each participating hub received an analysis of their financial performance compared to the benchmarks reported in this study. Hubs that use the benchmark data in combination with sound financial, operational, and marketing practices will enhance their capacity to optimize value to all players in the regional food system. Farmers, food producers and communities will benefit. So will lenders, investors, and grant makers. Sustained profitability for regional food hubs is critical to the emergence of this new force for community economic development throughout the United States.

NOTE: To provide a clear financial picture across these social enterprises, Counting Values separated food hubs’ business income and costs from grant and donation income and related programmatic costs. The social and environmental benefits that hubs generate are the subject of a National Food Hub Survey that’s expected to be released in fall 2015. The survey is a project of the Michigan State University Center for Regional Food Systems and the Wallace Center at Winrock International. Together, these two studies provide the best available data on intermediated market channels for good food products and practices.