Food Hub Viability

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James Matson with Matson Consulting along with Micaela Fischer with Michigan State University presented on Food Hub Viability at the 2014 National Good Food Network Food Hub Collaboration Conference. The presentation was part of a plenary session on March 27, 2014 in which presenters take a look at the operating strategies of different food hubs around the country, and explore how increasing financial viability can make their desired community impact become a reality that can be sustained in the coming years.

Transcript of Food Hub Viability

Page 1: Food Hub Viability
Page 2: Food Hub Viability

A Presentation on Food Hub

Viability

Presented By:

James Matson

Owner- Matson Consulting

Micaela Fischer

Graduate Affiliate, Center for Regional

Food Systems,

Michigan State University

In Collaboration With

Page 3: Food Hub Viability

Additional Food Hub

Resources

Matson, James; Sullins, Martha;

Cook, Chris. (January 2013). The Role

of Food Hubs in Local Food

Marketing. The United States

Department of Agriculture Rural

Development.

Fischer, Micaela; Hamm, Michael; Pirog,

Rich; Fisk, John; Farbman, Jeff; Kiraly,

Stacia. (September 2013). Findings of

the 2013 National Food Hub

Survey.

Coming Soon:

Matson, James. (March 2014). U.S.

Food Hub Operations Guide. The

United States Department of Agriculture

Rural Development.

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Food Hub Viability Introduction

Workshop will combine three different data sources:

Findings of the 2013 National Food Hub Survey

Pathways To Food Hub Success: Financial Benchmark Metrics And Measurements For Regional Food Hubs

Matson Consulting Prototypical Food Hub

Each source will have slightly different results.

Workshop intends to create a clearer discussion on typical food hub viability.

Presenting ongoing research. Some data presented here is preliminary. Final results will differ.

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Discussants

Kathy Nyquist—New Venture Advisors

Erin Pirro—Farm Credit East

Darrow Vanderburgh-Wertz—

Wholesome Wave Investments

Provide comments, critique, and context.

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Food Hub Viability

Information from the 2013 National Food Hub

Survey

Micaela Fischer

MSU Center for Regional Food Systems

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Food Hubs Emerging and

Growing

Over 220 listed on the Food Hub Collaboration website.

62% are 5 years or younger!

32% are 2 years or younger!

More hubs in East/West

coast states than in

middle America.

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Finances

Sales Revenue

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Financial Success

Most either ―somewhat‖ or ―not at all‖ dependent of grant funding.

Most have revenues that exceed, or are close in value to their expenses.

Business Efficiency Ratio=

Expenses/Revenue

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Financial Viability

Unpublished financial findings and

updates with the publication forthcoming.

Unpublished study using data from the

2013 National Food Hub Survey.

Divided food hubs into two groups based

on efficiency ratio.

Compared operating characteristics between

two groups (logistical regression).

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Financial Viability - Scale

Financially viable hubs had median 2012 revenues of $600,000 and sales of $450,000.

Hubs that were not financially viable had median revenues and sales of much less—$200,000 and $137,000 respectively.

Every $100,000 increase in revenue represents a 38% increased odds of being financially viable.

All food hubs classified as not financially viable had 2012 revenues under $500,000.

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Financial Viability & Employees

Financially Viable

Median number of paid

employees = 4

Median salary per paid

employee = $15,370

Not Financially Viable

Median number of paid

employees = 3

Median salary per paid

employee of $14,560

Median % of revenue spent on employee salaries and

benefits is 71% more for food hubs that are not financially

viable than for food hubs that are (25.33% vs.14.79%).

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Financial Viability & Expense

Structure

Food hubs that were not financially viable tended to spend nearly twice the proportion of revenue on overhead costs than did financially viable hubs.

Most financially viable food hubs are emulating more traditional food distribution businesses in their expenditure patterns

Closer to 15% of revenue on employee salaries and benefits and

Closer to 70% on food and product purchases (COGS, or Return to Farmer).

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Financial Viability & Expense

Structure

Median Expenses as a Percent of Revenue

All Food

Hubs (N = 107)

Financiall

y Viable (N = 63)

Not

Financiall

y Viable (N = 15)

Food/product purchases 67% 68% 63%

Payments for warehouse or facility space 3% 2% 4%

Payments for trucks and equipment 2% 2% 5%

Gasoline and tolls 2% 2% 2%

Utilities 1% 1% 3%

Credit card and bank service charges 2% 2% 3%

Employee salary and benefits 18% 15% 25%

Consulting services 1% 1% 2%

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The Benchmark Study: Pathways

To Food Hub Success

Collection of historical financial results and operational information from similar food hub businesses

Comparison to peer group

Analysis of information to identify a range of performance

Presented by the Wallace Center and WinrockInternational

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The Scope of Operations

Average Age of Food Hubs: 11

Years

Average Revenue: $1.65

million

Annual Operations: 301

Days

Facilities:

Square Footage 9,018

Number of Loading Docks 2

Delivery Fleet (annual miles driven)

54,001

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Case Study Introduction

Presenting data from current client work and

experience.

Preliminary draft of a generic food hub.

Verified this data with findings from the

Benchmark Study and the Food Hub Viability

Survey.

Model begins with a level of break-even sales

and grows to a point of long term viability.

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Case Study Generalities

Food hub is in a suburban locale.

Food Hub is assumed to have access to a variety of producers and members.

Located within 50 miles of customer locations.

10,000 square feet in size (adequate space for storage, handling, and cooler space).

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Case Study General Operations

Operations in all months of the year

Product lines have seasonality.

Product will arrive and be handled by general

labor employees. Product will then be placed

in the appropriate storage area or readied for

delivery.

Deliveries/Pickup (six day operating)

Staffing Roles

General labor staff loads delivery vehicle.

Supervisory staff oversees.

Delivery driver arrives and makes route.

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Case Study Product Lines

Product examples may include: Fresh Produce: Corn

Peppers

Cucumbers

Watermelon

Cantaloupe

Other: Honey

Jams

Dry Pasta

Dairy: Liquid Milk

Cheese

Other

Fresh

ProduceDairy

Products

Butternut Squash

Tomatoes

Berries

Asparagus

Meat

Eggs

Yogurt

Butter

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Case Study Finances

Three year window of financial operations.

beginning with when the food hub is

approaching operational break-even.

Looking at operating at normal staffing and

paid staff.

Food hub has $225,000 loans on books and

uses a working capital loan up to $90,000 to

cash flow shortages.

This case study begins after the start up period has

been completed. It may have taken several years to get

to this point.

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Case Study Annual Sales

Projections

Operational

Break-Even

Financial

ViabilityGrowth

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

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Case Study % Product Sold by

Month

— Year Product

Average

— Seasonality

Averages

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Case Study Seasonality by

Product

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Fresh ProduceDairy Products

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Case Study Variable Costs

Variable Costs

Break-

Even

Financial

Viability

Product Lost in Transport/Handling &

Returns (3.2%) (3.3%)

Revenue to Farms (0.7) (69.8%) (69.7%)

Credit Card Processing (0.2%) (0.2%)

Packaging Material Expense (0.2%) (0.2%)

Variable Labor & Delivery Expense (5.1%) (4.5%)

Total Variable Costs (78.5%) (77.9%)

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Case Study Overhead Costs

Overhead Costs Break-Even

Financial

Viability

Payments for warehouse or facility

space (3.6%) (1.5%)

Payments for trucks and equipment (2.5%) (1.7%)

Total Selling and Marketing Costs (0.4%) (0.3%)

General and Administrative

Expenses (11.1%) (9.3%)

Unforeseen and Contingency

Expenses (4.0%) (4.0%)

Overhead Costs 21.5% 17.1%

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Case Study Expenses Break-

Even

Variable Costs

Equipment Costs

Facility Costs

Marketing Costs

Gen/Admin Costs

Unforseen Costs

Depreciation

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Case Study Wholesale Profit and

Loss

Break-Even Financial Viability

Revenues (Sales) 100% 100%

Total Variable Operating Costs (78.5%) (77.9%)

Variable Margin (Loss) 21.5% 22.1%

Total Equipment Costs (2.5%) (1.7%)

Total Facilities Costs (3.6%) (1.5%)

Total Selling and Marketing Costs (0.4%) (0.3%)

General and Administrative Expenses (11.1%) (9.3%)

Unforeseen and Contingency Expenses (4.0%) (4.0%)

Wholesale EBITDA (Loss) 0.0% 5.4%

Interest Expense (0.5%) (0.5%)

Depreciation Expense (0.7%) (0.8%)

Net Income (Loss) (1.3%) 4.1%

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Case Study Cash and Income by

Month

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Increase or Decrease In CashEBITDA

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Case Study Labor

5 FTE’s

Labor Roles:

Management

General Manager

Production Manager

Sales Manager

General

Delivery Driver

Line Supervisor

General Labor

Office/Administrative Labor Costs

Management

General

Office/

Administrativ

e

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Case Study Management

Salary

0

20000

40000

60000

80000

100000

120000

140000

160000

Salaried Labor

Financial

Viability

GrowthOperational

Break-Even

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Scenario: Break-Even with Added

Funding

$1,210,000

$1,094,374 $1,026,154

$739,713

$493,401

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Baseline Added $25,000

Added $50,000

Added $100,000

Added $150,000

Sale

s L

evel

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Scenario: Break-Even with Added

Costs

$1,210,000

$1,327,304 $1,441,389

$1,677,724

$1,791,809

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

Baseline Expense of $20,000

Expense of $40,000

Expense of $80,000

Expense of $100,000

Sale

s L

evel

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Example – Increase in Hourly

Labor

Hourly Wage

Baseline 20% Increase

Driver $13.00 $15.60

General Labor $10.00 $12.00

Line Supervisor $15.00 $18.00

Office/Administrative $16.00 $19.20

If the food hub experienced increases in hourly wages,

the food hub would need an nearly $12,000 in direct

funding from outside sources or approximately $70,000

of sales to maintain a break-even level of operations.

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Break-Even vs. Return to Farmers (% of Sales)

$935,009

$1,210,000

$1,717,396

$2,901,422

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

65% ReturnBaseline: 70% Return75% Return 80% Return

Sale

s L

evel

(23%)

Decrease

from

42%

Increase

from

140%

Increase from

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Retail vs. Wholesale

Differences

Smaller operation with higher gross margins

Reaches operational break even and long term

viability at lower gross sales

Direct sales to end consumers

More added cost of direct sales

Set up and operate retail storefront

Different labor requirements

Retail labor should have an expanded skill set to

deal with clients.

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Preliminary Retail Model

Key Changes to Retail Model:

60% return to farmers

No GAP certification

Addition of shelf stable items purchased from outside

producers

Required man hours equivalent to 10 full time employees

No product delivery expense

Lease of a smaller combined warehouse and retail space

We created a preliminary retail model to show potential

differences between a wholesale and retail food hub and

these differences affect the sales level required to breakeven.

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Preliminary Retail Model

Results

In order to reach an operational breakeven with a retail model the food hub must achieve a sales level of$660,000. The gross margin of the business would also increase from 21% in the wholesale model to 28%.

$660,000

$1,210,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Retail Wholesale

Sale

s L

evel

Sales Required to Breakeven

(83%)

Decrease

from

Baseline

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Conclusion

Wholesale food hubs can achieve financial viability as a medium scale business. $1.2 M to reach an operational break – even

$2 M to reach longer term viability

Grants or other contributions can significantly lower these thresholds

Higher costs can increase break – even levels so great care needs to be paid to sales levels vs. costs. Returns to farmers

Labor costs

Balancing cash flow throughout the year requires significant planning.

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Want to Know More?

Contact Matson Consulting: Contact Micaela:

Micaela Fischer

Graduate Affiliate

Center for Regional Food

Systems

Michigan State University

[email protected]

James Matson

Matson Consulting

www.matsonconsult.com

(803) 233-7134

[email protected]

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