Transcript OPPORTUNITIES FOR VALUE

MARKETING COSTS
IN ALTERNATIVE MARKETING CHANNELS
Shermain Hardesty & Penny Leff
University of California
Small Farm Program
OVERVIEW
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Growth in Direct Marketing
Objective & Approach
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detailed review of marketing related expenses
Application to YOUR farm
Comparing Profitability in Alternative
Channels
Growth In Direct Marketing
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Direct agricultural marketing, particularly
farmers’ markets, has grown in popularity
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Farms engaged in direct marketing increased from
86,432 in 1992 to 110,639 in 1997 and 116,733 in
2002
Revenues rose from $404.1 million in 1992 to $812.2
million in 2002
Promoted extensively by small farm programs
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Farmers markets
CSAs
Roadside stands
Objective & Approach
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Compare the relative marketing costs and
profitability of different marketing channels—
farmers’ markets, CSAs and wholesale markets
Based on case studies of 3 organic fruit and
vegetable producers
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Well established
Small, medium & large
Northern California
Sell through farmers markets, CSA and wholesale
Approach
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Excluded all costs involved in crop production
Developed detailed list of postharvest activities
involved in the flow of product from the field to
consumers for the different marketing channels
Subsequently grouped these activities into 3
categories
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packing and storage
transportation
marketing and administration
Sorting & Packing Costs
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Sort & pack product – facilities &
equipment
Sort & pack product – labor & materials
Load, unload truck – labor
Maintain market supplies & equipment –
labor
Training & supervision - labor
Transportation Costs
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Delivery vehicle - capital & operating costs
Delivery – labor
Contracted Trucking
Tolls
Driver training & delivery management labor
Selling & Administrative Costs
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Market communications –
labor
Wholesale sales – labor
Retail sales – labor
Marketing materials costs
– labor and materials
Sales staff administration
– labor
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Office facilities,
equipment, supplies,
services use
Record keeping systems
Account maintenance,
banking, bookkeeping –
labor
Other office staff – labor
Business planning – labor
Measuring Costs
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Chronological sequence of events involved from
harvest through sales
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examined separately for each day of the week for the
seasons (winter, summer) and for each market
channel
elicited estimates of staffing and hours of labor
involved for each marketing activity in each market
channel type
determined what purchased goods and services and
capital assets were utilized
Measuring Costs
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Used original purchase values and straight
line method to calculate depreciation
Valued operator labor at same rates paid
to hired labor for same activity
MEASURING MARKETING COSTS
FOR YOUR OPERATION
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Combining direct marketing and wholesale
selling as a small or mid-size grower
usually involves a complicated pattern of
shared use of labor, vehicles and facilities
by the different marketing channels.
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To determine the profitability of each
channel, we need to look closely at
this pattern and allocate the costs as
accurately as possible. We have
prepared a series of worksheets to
help put all this information into a
useful order.
Worksheet 1- Asset & Labor Usage
Allocating shared costs
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Allocate Packing Facility costs based on hours
used by each marketing channel
Allocate Transportation Labor costs based on the
percentage of vehicle use time for each
marketing channel.
Allocate Office Facility costs based on the hours
the office is used by each marketing channel.
Allocate Transportation Vehicle costs based on
the percentage of vehicle miles driven for each
marketing channel
Very Important note:
Because owners and family members
usually do many marketing tasks on a small
farm, payroll records are not sufficient for
allocating costs. When computing the hours
and miles for the different marketing
activities, be sure to include time spent by
the farm owners and family members, even
if they are not paid a wage, in order to get
an accurate picture of the labor cost of each
channel.
Worksheet 1 - Allocating
Packing Facility Costs
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Start with a normal workweek in Summer
List each task in packing facility, starting with
washing or cleaning produce and ending with
loading delivery vehicles
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Determine how many people-hours each task takes
for product destined for each marketing channel,
estimating where needed
Include owner & family labor hours
Add up usual weekly labor hours for each
channel for Summer work pattern
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Total should equal 100% of weekly Summer packing
facility labor hours, including cleaning & maintenance
Worksheet 1 - Allocating
Packing Facility Costs
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Repeat the process for Winter or other seasonal
weekly work pattern
Multiply by number of weeks for each pattern
Add seasonal totals to determine total annual
packing facility hours for each marketing channel
Divide annual hours for each channel by total
annual hours for all channels to determine
percentage use of packing facility by each
channel. This is the basis for allocating costs.
Worksheet 1 - Allocating
Transportation Labor Costs
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Using first a normal Summer weekly work pattern, then
a normal Winter weekly work pattern, list all delivery
vehicle usage hours, broken down by marketing channel
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Assign hours that vehicle is parked at a farmers’ market as
farmers’ market hours for this purpose
For combined loads, assign hours based on the percent value of
product going to each marketing channel
Determine total annual delivery vehicle hours for each
marketing channel, making sure that combined total
equals 100% of delivery hours
Divide total hours for each channel by combined total to
determine percentage use for each channel. This is the
basis for allocating transportation labor costs.
Worksheet 1 - Allocating Facility
Costs, Sales & Admin Office
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List the people who work in the office, including
owners & family members
List total hours in office for each person
Break total hours down for each person, listing
hours spent on tasks for each marketing
channel, and also hours for non-marketing office
tasks such as production payroll & planning
Determine percent of office labor hours used for
each marketing channel. Total will be less than
100% of all office labor hours if office is used
also for production administration.
Worksheet 1 - Allocating Transportation
Asset & Operations Costs
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Starting with weekly delivery vehicle use patterns,
compute annual miles delivery vehicles are used for each
marketing channel, and then percent of total combined
mileage for each channel, using methods used above.
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Mileage for each portion of a mixed load delivery route can be
estimated by allocation to each segment the proportion of the
total miles for the route that is the same as the proportion of
value of product delivered, or the proportion of space used in
the vehicle.
If delivery vehicles are also used for personal use or production,
note the percent of use for delivery.
If different vehicles have significantly different operating
costs, use Worksheet 2 as a guide.
Worksheet 3 - Labor Cost
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List the wage rate for each worker in a category,
such as “driver” or “packer” or “market sales”
Look up or estimate the number of overtime
hours in the year.
Use this information to figure out the actual
average hourly wage for each category
Add employer tax, workers’ comp, health &
other benefit costs per hour to determine
average hourly cost for each labor category
Worksheet 3 - Labor Cost
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Figure average legal wage rate for all
categories of work, including any work
customarily paid in cash and work often
done by owners & family members.
Note that the owner’s work is valued at
the rate per hour that is the same as the
average legal labor cost of a worker doing
the same work.
Worksheet 4 - Allocations of
Asset & Operations Costs
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Now we will add up the actual costs to be
allocated to each channel
First, the transportation operations costs
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List all delivery vehicle operating costs
If vehicles are used for both business and personal
use, or for production activities, list only the portion of
costs that approximate the portion of marketing use of
the vehicles.
Add all the costs listed.
Worksheet 4 - Allocations of
Asset & Operations Costs
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When computing packing and delivery labor
cost, use the total numbers of hours computed
in worksheet 1
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Multiply the total number of hours by the average
labor cost for each category of worker
Be sure to include owner and family labor hours
Selling labor costs will be added later for each
marketing channel
Sum listed costs and other costs as needed, to
determine total shared costs to be allocated
Worksheet 5 - Channel Specific
Costs
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Costs that can be clearly connected to a specific
marketing channel
Selling labor costs are all directly charged to the channel
where the sales occur
For selling labor costs for the farmers’ market channel,
add the total number of hours of selling labor and
multiply by the average hourly labor cost of a farmers’
market salesperson from Worksheet 3
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Include owner and family members’ hours
Do not count the driver/lead salespersons’ time at market twice
Worksheet 6 - Marketing Cost
Summary
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This worksheet puts all our computations
together.
Find percentage rates for allocations from
Worksheet 1
Find costs to be allocated from Worksheet 4
Multiply the appropriate percentage by the cost
to be allocated, and enter the results for each
channel.
Enter channel specific costs from Worksheet 5 as
needed.
Worksheet 6 - Marketing Cost
Summary
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Total each category of costs (packing,
transportation, selling & admin.) for each
marketing channel
Divide each total by the total revenue for that
channel to get cost as a percent of revenue.
Add category totals to get total marketing cost
for each channel.
Divide total marketing cost by total revenue for
each channel to get marketing cost as a percent
of revenue for each marketing channel.
Congratulations!
You have just determined a close
estimate of the marketing costs of
each of your marketing channels,
including the cost of the farm
owners’ and family members’
time.
Return to Marketing
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Subtract the final line in Worksheet 6, the
marketing costs as a percent of total
revenue, from 1 to get a percentage called
“Return to Marketing”
Medium Size
Case Study Farm, 2005
Acres
Full-time
Employees (yearround)*
Total Revenues
Wholesale
Revenues
Farmers' Market
Revenues
CSA Revenues
*Excludes operators
70
7
$659,086
$131,611
$196,960
$298,475
Marketing Costs For All Delivered Product By Channel, Medium Farm
Revenue
% of delivered product that is paid for (not unpaid, spoiled, or donated)
Packing & Storage Costs
Packing labor, packing shed utilities, supervision & administration, facility &
equipment depreciation
Packing materials
Total packing & storage costs as percent of sales revenue
Transportation Costs
Delivery vehicle fuel, insurance, maintenance, registration, depreciation
Delivery labor, driver supervision, transportation administration
Contracted trucking
Tolls
Other transportation costs
Total transportation cost as percent of sales revenue
Farmers'
Total Wholesale
Market
CSA
$627,046 $131,611 $196,960 $298,475
100.0%
80.0%
91.4%
$48,383
$10,019
9.3%
$11,338
$6,022
13.2%
$11,338
$0
5.8%
$25,707
$3,997
10.0%
$25,425
$23,331
$1,807
$1,323
$1,307
$388
$14,784
$15,065
$10,535
$6,943
$341
$412
15.3%
$341
$5,856
6.0%
$1,307
$1,070
$6,268
9.2%
3.7%
Marketing Costs For All Delivered Product By
Channel, Medium Farm
Total
Administration and Selling costs
Office costs allocated by % of office labor hours - Includes office rent, utilities, phone,
other general office services, and equipment depreciation
Other office costs - Include postage, CSA newsletter costs, non-production payroll
services, printing & copying, and bookkeeping & administration labor costs
Selling Costs - Include market supplies, conference & event fees, farmers' market fees,
CSA database & website, and selling labor costs
Total selling & admin cost as percent of sales revenue
Total Marketing Costs
Net Income (Revenue minus total marketing costs)
Marketing Costs as % of Sales Revenue
Farmers'
Wholesale Market
CSA
$14,573
$1,337
$1,588
$11,648
$47,410
$3,528
$5,350
$38,532
$42,950
16.7%
$0
3.7%
$39,050
23.3%
$3,900
18.1%
$220,736
$406,310
35.2%
$27,050
$104,560
20.6%
$87,928
$109,032
44.6%
$107,459
$191,016
36.0%
Net Rate of Return to Marketing
MA RKET CHA NNEL
Farmers'
A ll Channels Wholesale
Markets
65%
79%
55%
CSA
64%
COMPARING PROFITABILITY
ACROSS CHANNELS
Factors Affecting Overall Profitability
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Cost of production as a proportion of
wholesale income, expressed as a
decimal value. (Call this C)
Proportion of farmers’ market load that is
actually sold (Call this S)
Average price markup rate for farmers’
market prices from wholesale prices
(Call this M)
2 Sources of Unsold Product
At Farmers Markets
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Product used for sampling, customer
bonuses, and rounding-off weights.
Product not sold because of lack of
demand (such as bad weather) or because
farmer used the marketing strategy of
keeping the tables full all day (and much
of this product is subsequently donated)
Unsold Product for Medium Farm
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Estimated proportion of delivered product
that was unsold was about 20%
But 30% of the unsold product was
overripe or too damaged to be sold
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.14 was unsold product rate for farmers’
market
Resulting in .86 (1 - .14) as value for S
Comparing Profitability
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Formula to determine profit of the farmers’ market channel minus
profit in wholesale channel
(RW is net rate of return to marketing in wholesale channel
and RFM is net rate of return to marketing in farmers’ market
channel):
1-
1
RW  RFM
(
)
S (1  M )
C
Comparing Profit in Farmers Market
minus Profit in Wholesale
for Medium Farm
If Production & Overhead Costs are 70% of each dollar of wholesale revenue C
Percent of Farmers'
Market Load that is
sold (paid for) (S)
60%
70%
80%
90%
95%
Markup from
wholesale price (M)
30%
-62.5%
-44.2%
-30.4%
-19.8%
-15.3%
40%
-53.3%
-36.3%
-23.6%
-13.7%
-9.5%
50%
-45.4%
-29.5%
-17.6%
-8.4%
-4.5%
60%
-38.5%
-23.6%
-12.4%
-3.7%
-0.1%
70%
-32.3%
-18.3%
-7.8%
0.4%
3.8%
80%
-26.9%
-13.7%
-3.7%
4.0%
7.2%
90%
-22.0%
-9.5%
-0.1%
7.2%
10.3%
100%
-17.6%
-5.7%
3.2%
10.2%
13.1%
Conclusions
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Higher prices charged when direct marketing are
necessary to cover higher marketing costs
Differences in profitability across market
channels are affected by:
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Net rate of return to marketing in each channel (R)
Proportion of product actually sold (S)
Markup rate (M)
Cost of production (C)
Direct marketing can provide a market for
produce that is not sellable in wholesale channel