Founder Hat – Local Food Economics

What I see often with startup food hubs or aspiring food system programs is that they’re often trying to be too many things to too many people or too many constituents and then end up not actually adding value to any one of them or significant value. And so, I would say focus, find your niche. Figure out how you’re going to create the most value for a number of folks. Go deep in partnership before spreading yourself too thin.

-Haile Johnston, Common Market

Foundation for Your Organization

As a food hub founder your first role is to understand the needs of the farmers, food businesses, and food buyers in your region. From there, you can pair your own expertise with that of your potential partners and colleagues, locally and across the country, to inform the design of your hub. This is often referred to as ‘finding your niche’ or finding your position in the regional food system where your food hub can thrive.

The Regional Food Hub Resource Guide⁴ offers three ways for you to consider how your hub can respond to these needs within your local and regional food system:

Expanding market options and revenue
Providing infrastructure for storage, processing and distribution, and marketing (personnel with right- sized marketing skills and a marketing budget).
Lowering transactional costs: more and diverse ag products, higher sales, steady profit

As you set about building your foundation and defining the niche, ask yourself the following questions to understand your hub’s specific contribution to the local or regional food system.

What markets do local producers have trouble reaching?

Are there certain products that buyers struggle to purchase locally?

Are there buyers who can’t access local food at all?

What are the infrastructure challenges of your regional food distribution system?

You can also find some inspiration by listening to the Food Hub Podcast Episode 1

Mission Matters

While you are defining your niche in conversation with your potential growers, buyers, and community partners, you are well on your way to also defining your mission or the purpose your hub serves, which will lay the foundation of your food hub business or organizational plan. The hubs we interviewed also highlighted a distinct set of values and goals for food system change that informed how they set about implementing their niche, mission, and model, and how those core elements remained front of mind as these hubs grew and transformed. You can explore each of their mission statements in the Food Hub Profiles section.

You can also find within The Local Food Organizational Toolkit: Part 1 Defining your Organization’s Focus and Leadership⁵, developed by Iowa State University, useful resources related to mission, vision, and business planning. For more inspiration, check out some examples of strategic plans and impact reports from our advisors.

Food Hub Business Structures

With your niche and mission underway, you are ready to start building the organizational scaffolding. Common food hub structures address legal status, markets served, and services provided.

Legal Structure
Food hubs legal structures fall into five main types⁶: (i) non-profit,⁷ (ii) for profit,⁸ (iii) cooperatives,⁹ (iv) publicly held, and (v) other or no legal structure. In 2017, 42% of food hubs were nonprofit, 37% were for-profit, 18% were cooperative and the remaining 3% were publicly owned or cited another legal structure.¹⁰ When considering the benefits of each model, Appendix D: Comparison of Common Business Structures in Running A Food Hub: A Business Operation Guide Volume Two is a useful resource.¹¹

Each of the structures has a few common models. Non-profit food hubs can be stand-alone but are often a component of larger non-profit entities. This peer-reviewed journal article, ‘Economic viability of a food hub business: Assessment of annual operational expenses and revenues’¹² offers an example of how non-profit hubs may be associated with universities or county economic development foundations.¹³ For-profit food hubs often take the form of an LLC or B Corps. You can explore this article from Penn State Extension on ‘Choosing a legal structure for your agriculture business’,¹⁴ to gain more insight.

This journal article in Building sustainable food systems through food hubs: Practitioner and academic perspectives recommends careful separation of the business operations and non-profit educational or social impact functions of your hub.¹⁵ This will help you analyze and improve your business while also being able to clearly articulate your social impact to your partners, investors, and supporters.

Markets Served
Food hubs also differ by markets they serve. The 2017 National Food Hub Survey¹⁶ names three overarching food hub market services: direct to consumer (DTC),¹⁷ wholesale,¹⁸ and hybrid/both.¹⁹ DTC may include in- person or virtual/online marketplaces and you can find examples of direct to consumer (DTC) hubs in this journal article ‘Connecting small-scale producers and consumers: Exploring the feasibility of online food hubs in low-income communities’.²⁰ Wholesale hubs often serve institutional food service (e.g., schools, hospitals), restaurants, processors, other distributors or retailers. Hybrid hubs serve both markets.

Services Provided
Food hubs commonly offer many services, including logistics (aggregation, distribution, warehousing, transport); marketing (finding new markets, branding and labeling); adding value (bottling, washing, light processing, freezing shared kitchens); consulting and technical assistance (business management, insurance, production planning). We recommend this article Building Resilience in Nonprofit Food Hubs²¹ to learn more on services food hubs can provide when seeking sustainability and resilience.

We developed the Foundational Planning Template, which summarizes this chapter in foundational planning. You can use this simple document to easily consider your niche, value proposition, legal structure, markets served and services you will provide for your hub.

Foundation for the Value Chain

At its core, the food value chain is a representation of all the connections from producer to customer. But the food value chain also seeks to merge social mission objectives with core business operating principles, such as: transparency, collaborative business planning, and exchange of market intelligence and business know- how among chain partners.²² You can explore this further in a foundational article, Food Value Chains: Creating Shared Value to Enhance Marketing Success which was developed by AMS in 2014. As you develop your own value chains, the insights shared in this chapter can help you in developing business strategies and solutions that yield tangible benefits to each participant in the system.

Producer Network Development

Building collaborative relationships with and between farmers and food producers is central to food hub operations. Strategies for how hubs do this, however, can vary depending on the business model and mission of the hub or the needs of a specific opportunity. While it’s likely that most hubs will employ a mix of the following network development strategies, it is useful to consider which may be most responsive to a particular moment in the hub’s development.

Demand Driven
A demand driven network strategy starts with a specific customer need – a product, product line, marketing initiative – from which the hub would identify growers or supply chain partners with the capacity to meet that need. Grower outreach in support of a specific market opportunity must consider any relevant customer requirements such as food safety, traceability, and packaging or item specifications. A good example of this demand-driven strategy is the Montana Marinara project where the Northwest Food Hub Network partnered with Mission West and the Montana Office of Public Instruction to develop a locally sourced marinara sauce for k-12 schools.²³

Producer Driven
Producer driven networks start with an opportunity identified by a group of producers. Once identified, a hub would work with the producers to develop a marketing strategy to meet the need. Red Tomato is a good example of a producer-driven network where growers identified the need for a marketing strategy for ecologically produced tree fruit in a region where organic tree fruit is nearly impossible to grow at wholesale volumes.²⁴

Geographic Driven
A geographic network strategy focuses on building out a robust network of suppliers offering a wide range of products through multiple market channels within a specific geographic region. This strategy targets customers with a shared place-based identity, local purchasing commitments, or state-based policy incentives. Farm Fresh Rhode Island (FFRI) is an example of a geographic network where the markets, wholesale distribution networks, farm to school programs, value-added co-packers and all customers are committed to supporting agriculture in Southern New England. The FFRI value chain supports more than 300 producers across Rhode Island, Connecticut, and Massachusetts.

Mission Driven
For other mission-driven priorities, food hubs may focus on investing in market-readiness for specific types of growers that may lack access to the technical assistance or financing needed for market entry as a sole provider. Like the discussion of geography above, this strategy works best when your customer shares your commitment to local agriculture and sees your mission-driven approach as adding value above and beyond a traditional supplier. The Common Market, for example, leads with a commitment to supporting farmers and growers often new to wholesale markets. As such, their supply chain is made up primarily of small and mid-sized farms, ranches, and producers that are bolstered by mid-tier sales channels serving a regional sales area.²⁵

Foundation for Operations

We’ve always been at a 50/50 to 60/40 revenue stream of development to food distribution. I’m always looking to say, if we get to $10M, maybe we are then fully sustainable from distribution. But the model that’s built puts us in a position to understand what it takes to really build a long-term sustainable food hub business model that will sustain itself through trading produce from growers.

– Angel Mendez, Red Tomato

Accounting: Start with the Basics

As the founding or primary operator of a food hub, a key skill will be to develop and then read financial statements. It is recommended you get comfortable with finance basics any nonprofit or for-profit business needs to generate and understand:

Annual budget, including:
- Budget Actual
- Current Fiscal Year Prior Fiscal Year
The profit and loss or income statement
The balance sheet or statement of assets
The statement of cash flows, and
Reports of accounts payable aging and accounts receivable aging

For examples of these types of financials from our advisors, check out our resource section. Volume Three of the USDA guide on Running a Food Hub, also covers cost considerations for direct to consumer and wholesale food hubs.²⁶ See Iowa State Extension’s guide to help new food hub managers to help understand where to diginto financial planning for food hubs.²⁷

Calculating Startup Costs
Cooperative Extension across all 50 states provides dozens of resources for food hub operators to consider in developing financial projections, sales thresholds, and pricing models for their food hub. In March 2020, University of Minnesota Extension developed some outcomes for farm product aggregators that are generally relevant to food hubs.²⁸ The breakeven analysis and visuals can help you consider your hub based on income from fees charged to producers, to average markup on products, to customers and total sales across the hub. Rysin and Dunning’s 2016 article on the Economic viability of a food business²⁹ and this Iowa State Extension guide on Managing cash flow for a low-capital food hub start-up³⁰ may support your analysis. When specifically considering equipment Appendix B, Sample Equipment List from Running a Food Hub: A Business Operations Guide Volume 2 can help you get started.³¹

Financial and Inventory Software

As you and your team lay the plans for your financial projections, startup costs, pricing structures and more, planning for the computer software that will support you in managing it all is critical. Inventory management is, in almost all food aggregation scenarios, linked to sales management. As your inventory is purchased, your daily, monthly and annual sales increase and an accurate daily reflection of that shift can be vital to you, as the food hub operator, understanding your hub’s and your partner farmers’ profitability.

As you consider your software needs, take a look at Appendix C: Sample Questions for Software Selection from Running a Food Hub: A Business Operations Guide Volume Two,³² Using Accounting Software for Food Hubs: Processing Traceable Orders,³³ and you can find more resources in the Organizational Development: General listed at the end of this toolkit.

In addition to published articles guiding your software considerations we recommend you consider the following:

Reaching out to your network, mentors or advisors for advice on best software for a food
Developing an in-house review process to choose software or hiring an external firm to support a software auditing process.
Requesting demos of all potential software that is reviewed by designated staff or an auditing
Planning prior to software choice, the software migration timeline and process and ensuring all operations and staff are prepared for this timeframe.

Pricing Models

As you dig deeper into the financial side of your food hub, you can begin to consider a pricing strategy to meet your breakeven sales and meet the demands of your budget. Several pricing guides across Extension discuss cost plus pricing or markup pricing – with or without price elasticity, and margin pricing.

Cost Plus Pricing (Markup Pricing)
Simply put, cost plus pricing or markup pricing starts with the cost of providing a quantity of goods and then adds a markup for selling.³⁴ And there are several questions to ask yourself in adding a markup on your goods. Will your growers set their own prices? Will you blend purchase prices to offer a unified customer price? Do you know your precise cost of goods? What is your ideal “profit” on a transaction to cover hub costs beyond the goods you are buying and selling?

Markup pricing is a useful strategy when the full cost of goods (COGS) is less clear such as is the case when you have a mix of products in a single load, or inconsistent logistics from delivery to delivery. Markup enables hubs to offer their customers consistent pricing and buffer them from complexities on the backend. Good financial history will enable you to develop a markup pricing strategy that ensures profitability on average, even if your hub’s portion varies from transaction to transaction. The formula for markup pricing is:

(Delivered Price – COGS)/COGS = Markup

A note on price elasticity
Price elasticity refers to the buyer demand for the product. If the buyers’ demand is strongly affected by changes in price (elastic), then sellers must charge a smaller markup. If demand is price-inelastic, buyers don’t care as much about price, then a larger markup should be possible. You can read more in depth about pricing at A Manager’s Guide to Food Hub Finances, developed by Iowa State University Extension.³⁵

Margin Pricing
Margin Pricing is ideal when you understand your exact cost of goods (COGS), including transportation and handling. A margin pricing formula will enable you to “protect” your hub’s portion in every transaction. The formula for margin pricing is:

**COGS + (COGS*Margin%) = Delivered Price**

Table 2 provides an example comparison between margin and markup pricing.

The 2014 Food Hub Benchmarking Study reports an average gross margin of about 14 percent for the 48 hubs it surveyed. The most profitable top 25% of hubs had an average gross margin of 16%. A typical food hub operates at a close break-even with larger and older foods hubs holding an average 2% net profit, and young (10 years or less) food hubs averaged 1% net profit. But do not fret, according to the study, efficiencies are key to being profitable. Consider your operations regarding delivery and distribution, labor, shrink, and markdowns or discounts – and watch the markup. Make sure all products are priced with the objective of capturing the value that is delivered.³⁶

Foundation for Partnerships

When we asked our advisors what resources they used to help solve problems at their hubs, they agreed that the most helpful thing was getting other food hub operators on the phone to compare experience and ask for advice. Networking with other food hub operators can also lead you to funders, technical assistance providers, vendors, suppliers, and even buyers – all critical players to your success.

Phases of Collaboration

Michigan State University Center for Regional Food Systems published a research brief on food hub networks based on results of the 2021 food hub survey, called In It Together: Examining the Role of Food Hub Networks in Supporting Hub to Hub Collaborations.³⁷ While it may be logical to imagine that food hub networks are about hub-to-hub transactions, the research brief shows how food hub networking often follows the progression from networking to coordination, cooperation, and eventually collaboration. Figure 1 below, was taken from page 5 of the published brief, and provides an easy visual of that progression, and activities or outcomes involved.

Getting Involved

As you can see, it all starts with establishing connections and sharing information. Learning from your peers will help you anticipate challenges and opportunities as you articulate your niche and develop your model. You can read more about food hub networks, and how to get involved, in the Supply Chain Builder Hat section of this toolkit. The Food Systems Leadership Network’s Communities of Practice offer a space for you to build and expand your networks.³⁸ Lastly, this listing of National & Regional Food Systems Networks,³⁹ a part of the Local and Regional Food Systems Response to COVID Resource Hub,⁴⁰ was designed to help players in this space establish network connections ahead of time, in order to facilitate rapid mutual aid responses in times of need.

We hope that this toolkit and accompanying podcast can connect new operators to advice from others in the field; however, we created this toolkit at one point in time, and the relevant advice may change. We encourage operators to reach out to more experienced hubs to make sure you are getting the most up to date insights possible.

Get to Know Your State Department of Agriculture

State departments of agriculture, together with local extension offices, can help food hub founders identify local funding and technical assistance opportunities, information about state regulations, zoning, tax credits or incentives, potential producer or buyer introductions, and many other important connections.⁴¹ For example, the California Department of Agriculture operates a grant program to support food hub operations.⁴²