Food Hubs: 10 Lessons on Viability

This is an abbreviated excerpt of an essay in Harvesting Opportunity: The Power of Regional Food System Investments to Transform Communities. For more information visit https://www.stlouisfed.org/community-development/publications/harvesting-opportunity.

Individual farmers often have too little product to satisfy large buyers such as local grocery chains and institutions, while large buyers struggle to find local producers who can provide sufficient, consistent supply for consumer demand. Food hubs offer a solution for both groups by providing aggregation, distribution and marketing services. This allows local growers to access large buyers while simultaneously coordinating efforts with distributors, processors, wholesale buyers and even consumers to allow those customers to meet the growing market demand for source-identified, locally or regionally grown products.

Along with providing these core operational functions, food hubs often provide training and assistance to producers in areas such as sustainable production, season extension, post-harvest handling and packing, branding, certification, and food safety—all of which can increase access to wholesale customers, such as food service and other institutional buyers. At the same time, food hubs often engage directly with their community through donations, educational programs and health-awareness campaigns.

In this way, food hubs function as a link in the logistical chain to convey food products to midscale buyers who sell to the end consumer. The relationship between food hubs, buyers and farmers is illustrated in Figure 1.

Figure 1

Types of Services Offered by a Food Hub

Why Invest in Food Hubs?

The foremost benefit of a food hub is its ability to make sales and achieve a profit. Economically, food hubs are showing impressive sales performance and helping to retain and create new jobs in the food and agricultural sectors. Socially, most food hubs are providing significant production, marketing and enterprise development support to new and existing producers in an effort to increase the supply of local and regional food. Quite a few food hubs make a concerted effort to expand their market reach into underserved areas where there is a lack of fresh, healthy food. And finally, environmentally, most food hubs encourage their producers to use more sustainable production practices, as well as find innovative ways to reduce their energy use and waste in the distribution system.Hardy, J.; Hamm, M.; Pirog, R.; Fisk, J.; Farbman, J.; and Fischer, M. 2016. 2015 National Food Hub Survey. Michigan State University Center for Regional Food Systems and the Wallace Center at Winrock International. http://foodsystems.msu.edu/resources/2015-food-hub-survey.

What Have We Learned?

In both the roles of a public servant and private consultant, we have worked either directly or indirectly with hundreds of food hubs in the U.S., providing business development and financial guidance. Through many years of engagement, we have learned a few tried-and-true good business practices for running a successful food hub operation.Matson, James; Thayer, Jeremiah; and Shaw, Jessica. 2015. Running a Food Hub: Lessons Learned from the Field. USDA Rural Development Service Report 77, Vol. 1. https://www.rd.usda.gov/files/SR_77_Running_A_Food_Hub_Vol_2.pdf.

Lesson No. 1

This lesson is the cornerstone of food hub financial viability that all the other lessons are predicated on. We call it the “Oxygen Mask Rule of Financial Viability.” As socially driven businesses look to secure both economic and social benefits, it is easy to lose focus of the economic bottom line in efforts to maximize the social mission. As such, it is essential for a hub to secure its own oxygen (i.e., profit margin) before assisting others with their oxygen (i.e., community benefits). As research has shown, “food hub profitability is the springboard to achieving the broader mission-related goals.”Farm Credit East, Wallace Center at Winrock International, Morse Marketing Connection and Farm Credit Council. 2014. Counting Values: Food Hub Financial Benchmarking Study. http://ngfn.org/resources/ngfn-database/knowledge/Food Hub Benchmarking Study.pdf.

Other Lessons

2. Don’t sell commodities

It is essential to differentiate your products from others in the marketplace. On one level, this can be accomplished by developing a strong brand that tells the farm and farmer story as well as the values behind the story. The story must be simple, compelling and credible. Most importantly, the brand value and values reflected in the brand should speak directly to what is important to the customer audience (e.g., high quality, unusual varietals, local family farms, sustainable production practices and social equity).

3. Sweat the small stuff

The marketing and sales staff (often it’s just one person) must know every intimate detail of the production and handling practices for every product sold under the hub’s brand. This is necessary to tell an authentic story about the producers they work with and to assure their buyers that products are produced, handled and delivered in a way that minimizes food contamination. (Food safety is an ever growing concern.) Also, given the bootstrap, sweat equity nature of food hub businesses, it’s a good idea to train the delivery staff (i.e., truck drivers) so they are knowledgeable about the producers and products, as well as have excellent customer relations skills. They are often the face of your business.

4. Be there all year for your customers

Strive to offer enough variety of products so that you can sustain a year-round operation, which is essential for covering fixed operating costs and helps to ensure constant communication with your buyers. This means working with suppliers on season-extension practices, offering shelf-stable and value-added products, and offering less seasonally dependent products, such as dairy and meat. Finally, be pragmatic in your approach. You may not be able to offer “local” products year-round, but you can offer fresh produce from other areas that still conform to the values espoused in the brand (e.g., sustainably grown products from small family farms).

5. Get buyer commitment

With a good brand, quality products and a reliable delivery service, food hubs have little difficulty finding and maintaining accounts, but they do struggle to get some buyers’ commitment to purchase in higher volume regularly. Many food hubs have mismanaged their growth by acquiring too many accounts with a low volume of orders. Be clear with new customers on volume expectations and continually work with existing customers to increase their purchase orders, which can be done through a combination of specials, incentives, rewards and public recognition awards for being a “committed” buyer.

6. Think farmers first

Ultimately, all marketing success is dependent on the producers you work with, so they should always be treated as valued and essential partners in your business instead of interchangeable parts of a supply chain. Food hubs work hard to ensure good prices for their producers and often provide technical assistance or find partners that can provide this in such areas as sustainable production practices, production planning, season extension, packaging, branding, certification and food safety. This assistance helps build their growers’ capacity and ensures a steady and reliable flow of quality products through the food hub to the buyers.

7. Make friends

Seek operational advantages by identifying partnerships with players with distribution infrastructure, such as existing distributors, producer groups, trucking companies and food banks. This requires a hub to take a critical look at their business assets to identify their core competencies and then to establish relationships with others to ensure it can meet its business and social objectives. When it comes to financing, hubs need to carefully evaluate their financial partners to find those funders who understand that the food hub business model requires patient capital with likely low rates of financial return but significant potential for high rates of social impact return.

8. Don’t buy what you don’t need

Infrastructure investment (e.g., a warehouse, trucks and equipment) needs to match the hubs’ stage of development and marketing capacity. Infrastructure will be based on the product handling and storage needs of the food hub, but food hubs should still incorporate a long-term view of infrastructure and equipment to provide easier transitions through growth periods in the future.

9. Put food safety front and center

Food safety needs to be an integral part of the business operation, with food safety plans for producers, good agricultural and handling practices, and traceability and recall mechanisms in place. Also, allow the needs of the food hub customers to dictate the hub’s certification requirements. Whether required by customers or not, food hubs should take a long-term view by maintaining awareness of the food safety and regulatory environment in order to be prepared for future requirements.

10. Never forget “supply, supply, supply”

Without ensuring a consistent, reliable supply of quality products, you have no business running a food hub, and you will have no business. This is clearly related to the lesson “think farmers first.” At the end of the day, no product, no hub. Also, seek to source and provide a mix of products that will allow you to satisfy demand or an identified need in the market. This may include distribution of products that are not strictly “local,” but which still meets the mission of the food hub by encapsulating other qualities that are attractive to the customers, such as products from small family farms, sustainable production and health benefits.

James Barham is an agricultural economist and food systems specialist for USDA Rural Development and James Matson is owner and principal of Matson Consulting.