Marketing Through Wholesalers and Shippers

September/October 1992

Louie Valenzuela, Limited Resource Farms Farm Advisor, Santa Barbara County Cooperative Extension

Stephen Brown, Marketing Advisor, Los Angeles County Cooperative Extension

Prior to growing your product, every consideration should be given to the method by which your product will be sold or marketed. Most produce marketing is competitive and rapid due to the large number of handlers and large number of items that are available in the market place. Not only is the competition due to the many sellers, shippers, handlers, and buyers, but also to the competing products that serve as substitution items for any one product. For example, a substitution exists between peaches and nectarines. The price of peaches will affect the demand for nectarines and visa-versa.

Marketing facilities and services include box and crate assemblers, loading docks, common carrier transporters, cooling facilities, and the terminal markets. Box and crate manufactures and assemblers sell and provide the containers necessary to market your product. Some products have regulated box and crate designations that are defined by size and volume. If you market under your own label as opposed to a generic label or someone else's private label, these businesses can provide art work and design services to help you develop your own label. Loading docks make it easy to bring in a load of palletized product to be reloaded onto refrigerated tractor-trailers. Common transportation carriers (Public Utilities Commission regulated) provide the service of transporting your product in a consolidated load for a fee, to be delivered to a wholesaler in a terminal market, usually in a large metropolitan center. The wholesalers usually house the product in cooling facilities until the shipping point destination is determined. They also palletize products and reload them into refrigerated tractor-trailers to be shipped to intermediary or final destinations.

Terminal Markets

The terminal markets are colorful and bustling centers of free market enterprises. Information on quality and quantity of different items available for sale is conveyed rapidly. For new and/or established growers, the terminal market, as represented by the produce wholesalers, represent ease of access to the retailers (grocery store, supermarkets, restaurants, hotels, other produce wholesalers, etc.). The wholesaler, acting for the retailer, is the growers closest link to the consumer. Through the wholesaler, the grower gathers information on consumer's eating habits and often schedules the timing and type of production on the advice of the wholesaler.

The terminal markets of Los Angeles and San Francisco represent access to local, national and international clients. Wholesalers in these markets increasingly cater to smaller supermarkets. Large supermarket chains often buy directly from large growers. Small supermarket chains consequently offer small growers better opportunities for marketing low volume products.

Restaurant purveyors represent another aspect of the wholesale produce business. These purveyors make it their business to satisfy the needs of chain and individual restaurants. Small growers will find it advantageous to contact these wholesalers since their production can be catered to specific needs of well paying clients and the volume of products required is often less demanding.

Many wholesalers possess years of marketing experience and numerous marketing contacts. If a grower is not willing to spend the time and energy to make direct and continuous contacts with retailers and consumers then the use of wholesalers can only help to enhance his or her marketing efforts.

Selecting a Wholesaler

Depending on the number and quantity of crops grown, a grower may wish to work with one or more wholesaler. Some houses specialize in commodities, while others carry a full line of products. Selecting more than one buyer will increase the grower's resources in a competitive market. However, having a good working relationship with one dependable buyer is better than securing the service of many unreliable buyers.

One way in which to select a wholesaler is by word of mouth. Since many wholesalers have been in business for many years their reputation will have preceded them. Check with other growers in the area and see whom they recommend.

Growers should also consult the Red and Blue Books. These publications serve as watchdogs of the produce industry.

A visit to a terminal market and conversing with buyers can help one choose an appropriate buyer.

Selecting a buyer by phone is routinely done once the appropriate information has been gathered from various sources. This is especially true when rapid sale of the grower's merchandise is desirable. Indeed, once the grower selects a buyer, by whatever means, conversing over the phone will be the standard method of communication.

Wholesaler's Expectations

Once you have selected a wholesaler and your product is ready for delivery the wholesaler will expect the following:

1. At least 7-10 days notice on large deliveries or a one day notice on small volume deliveries.
2. Items should be packed in standardized containers.
3. Items should be of high quality
4. Amount to be shipped should be determined before shipment.
5. Price per weight of your product should be negotiated and determined the day before shipment. For the grower, it is important to know that these houses sell your product on a consignment basis. That is the grower assumes all price and product risk until the product is sold.
6. Whenever possible, supply of items should be consistent over the season.

Promotion via the Wholesaler

Buyers request a 7-10 day notice before delivery of large loads because the time allows them to make arrangements with their buyers (retailers) for shelf-space and/or promotion of the product; usually by radio or through a local newspaper. Factors determining the need for promotion includes:

1. an oversupply of product
2. alerting consumers of the seasonal arrival of the product
3. a determination to discount a particular item at the retail level
4. the quick sale of highly perishable items.

Cost of promotion is usually passed back to the grower. The lead time also allows the grower time to determine his/her margin of profit.

Standardized Packaging

Whether the grower self-packs or sends his/her products to a packing house, items should be packed in standardized containers. Standardized containers contain an established number of the requested items at a predetermined minimum weight per container. Standardized containers clarify the quantity of items being sold and the price per pound to be paid. Shipping without standardized containers may lead to a significant miscalculation of the total amount of money to be exchanged in a transaction.

Packaging standards are established by the USDA and enforced by the county Agricultural Commissioner Office of Market Enforcement. These offices are often located in the terminal markets.

Many specialty or exotic commodities are not yet assigned official containers but are sold in "agreed to" containers as determined by the practice of the trade. Contact your wholesaler or Market Enforcement office before packaging unusual products.

Price and Payment

The price of products is determined by its grade (US Extra Fancy, US Fancy, etc.) and the quantity entering the market. An example of a typical price breakdown is as follows:

A standardized box of 80 Washington Delicious Apples (24# net weight, 45# gross weight) is sold by the grower at $18.00 "FOB" (freight on board or cost without freight been included). Freight cost is an additional $2.00 per box to be assumed solely by the buyer or by both grower and wholesaler. The wholesaler sells the box to the supermarket at $23.00 per box (usually no more that an 18% profit). The market in turn sells the apples at 99¢ per pound (as much as 100% mark-up). If a broker is involved in the transaction subtract an additional 15¢ to 35¢ per box from the amount received by the grower.

If the supermarket refuses the box of Washington Delicious then responsibility for the loss becomes solely the growers. However, the wholesaler usually will attempt to move the product by way of another buyer. In that case, price adjustment may be necessary and is usually due to lower product quality.

Payment to the grower is made by the wholesaler, usually within three weeks after receipt of the product by the wholesaler.

USDA Inspection

Price paid to growers by the wholesaler is dependent on quality and quantity of product reaching the market. A grower may ship US Extra Fancy Washington Delicious Apples but the buyer may think it is less than the stated grade. In this case, either or both parties may request the service of The US Department of Agriculture Fresh Produce Inspection Branch. The Inspector will view the produce and determine if the shipment meets the minimum requirement as labeled. Determination is made based on the quality and size of the produce. If the shipment fails to meet the stated grade, the inspector will so state. There is no regrading. The shipment either passes or fails the stated grade. A failed grade will necessitate renegotiation of the price to be paid or rejection of the shipment. The service of the Fresh Produce Inspection Branch is available only on request and is provided to sellers and buyers of fresh produce.

Shippers

Some growers sell their product directly to buyers located in major growing areas, through the services of shippers. Shippers locate buyers, normally chain stores and wholesalers in major metropolitan areas. As in the case of a grower selling to wholesalers, a similar marketing protocol is as follows: shipper and buyer agree to a price which holds for the delivered product; the shipper handles transportation costs, arranges for transportation, cooling, or special handling; the shipper charges a commission, and pays the grower the net price after all deductions are made. If necessary, lower price adjustments at the receiving end are worked out to deal with quality dissatisfaction. Shippers may also assist the grower with production cost financing and may agree to suffer varying financial loss in the event of unsatisfactory crop yield. Shippers may also grow their own product but will consolidate with other growers in order to augment their market share.

Some growers are able to market their product directly to large volume chain stores. (At this point, the grower, in all probability, is no longer considered a small producer). Their price is sold "FOB". The buyer assumes responsibility for transportation and for the arrival of the product on the retail shelf.

Conclusion

Other methods of marketing for the small farmer involve "the direct marketing" approach. Direct marketing removes the "middlemen" (i.e. the wholesaler, broker, retailer) and put the farmer in charge of the whole process from planting to consumer receipt of the product. Farmer's profit per item sold is usually increased. However, this approach is limited by the growers lack of extended reach and network sophistication. Direct marketing methods include farmers' markets, roadside stands, U-picks, and direct sales to restaurants or other retailers. A good marketing plan should give consideration to both types of marketing practices; direct marketing and the use of intermediaries. By doing this, small farmers buffer their risk in the competitive world of produce marketing.