Direct Marketing of Animal Products

Direct Marketing of Animal Products Dr. Benjy Mikel Introduction to Animal and Food Sciences Agent In-Service The Original Market Product FARM FRESH PRODUCT The Original Value-Added Product FARM FRESH PRODUCT The Perfect Value-Added Product FARM TO FORK THE VALUE THE COST Why are These Groups Forming? • Farm value of products has not kept pace with total consumer expenditures on food. In 1950 it was 41% of purchases; today it is 22% Consumer Expenditures (billions) $600 $500 $400 $300 $200 $100 $0 1970 1973 1976 1979 Farm Value 1982 1985 1988 1991 1994 Marketing Bill Source: USDA, Economic Research Service The U.S. Food System Farm Gate $191 (29%) Ag Inputs $135 (8%) First Stage Processors $204 (8%) Food Manufacturers $286 (40%) Non-Ag Inputs $111 Wholesalers $225 (8%) Distributors $115 (15%) Specialty $57 (10%) $218 (35%) Supermarkets/ Grocery Stores $334 (2%) $19 (42%) Convenience Stores $33 (12%) $135 (62%) Restaurants & Institutions $352 (10%) $71 (31%) Other Food Retailers $103 (12%) $822 Billion Consumer Market The U.S. Food System • The $822 billion consumer market for food is characterized by the addition of value, overlapping distribution, and varying margins. • = Gross Margins • = Net Margins How Many Go Forward? Groups with Good Ideas Preliminary Investigation or Pre-Feasibility Assessment 50% 50% Groups Whose Idea Probably Will Not Work • No market or market is too small • Economics appear quite poor • Costs of entry are prohibitive Groups with Good Idea That Appear to Have Merit • Supply cost advantage • Growth markets • Technology Full Feasibility Study 25% 25% Groups with Good Idea That Upon Further Investigation Cannot Meet Economic / Market Objectives or Lack Leadership to Carry Project Through Groups with Good Idea that Appear to Have Attractive Returns, Interested Marketplace, and Strong Leadership to Take Project to the Next Level Business Planning & Equity Drive 15% 10% Groups with Good Idea, Dedicated Business Oriented Interim Management, Attractive Returns After Further Scrutiny, and Complete a Successful Equity Drive Groups with Good Idea, but Lacked Committment from the Board to Go Ahead, or Lacked Qualified Management to Go Ahead with the Final Steps Pit Falls of Direct Marketing • • • • • • Possible Upfront Financial Outlay Cost/ Profit Ratio of Products Lack of Marketing Skills Lack of Processing Infrastructure Liability Insurance Regulatory Requirements Keys to Successful Direct Marketing of Beef •Know your Product(s) •Know your Consumer Clientele(s) •Know Local and Federal Regulations •Develop the Necessary Infrastructure * Processing capabilities * Distribution avenues * Market Segments * Cooperative Arrangements * Cash Flow Requirements Today’s Consumer Demographics • Growing Ethnicity • Aging Population • Increase in “non-traditional” families/ no-kid families • Dual income family growing Consumer’s Value Priorities Variety Time Pressure Nutritional Benefits Safety Economic Uncertainty Taste Time Pressure Economic Uncertainty Nutritional Benefits Foodservice • 52% of U.S. Food Dollar is Spent in Restaurants • Beef is #1 Ordered Protein • 7.2 Billion Servings of Beef to 5.4 Servings of Chicken • Servings have Increased 14% Since 1990 Spending Shifts Foodservice is Capturing Greater Share of Food Market % of Consumer Expenditures Foodservice 1972 1992 1997 Source: Technomic, 1997 Retail 62% 49% 48% 38% 51% 52% Convenience Shopping Take-out Meals 16% 23% 26% 30% 1984 1988 1992 1996 = = = = Source: Food Trends 1997 Study Impact on Consumers • Consumers want products and services tailored to their wants and needs • They also have an inherent need to streamline their lives • And, they want products they feel good about when serving their families Know Your Customer! • 6% purchase groceries online • 45% buy prepackaged meals at the service deli • 81% read food labels • 87% are willing to pay more for quality products • 75% are concerned the temperatures in the dairy case aren’t cold enough Beef Quality Grades Based on AGE and MARBLING Creating New Value Successful firms continuously “invent” new value. We present Ocean Spray Cranberries’ process as an example: Fresh Cranberries Cranberry Sauce Cranberry Juice Mixed Fruit Drinks Single Serve Fruit Drink Bottles Frozen Slush Product with Dispense Fruit Cookies Fruit Flavored Candy The Center of the Back is Most Tender Transition Areas Most Tender Least Tender Least Tender New Products • Marketing of the less valuable “end meats” from the chuck and round • Further processing (pumping, mechanical tenderization, or other methods) to enhance flavor, juiciness, and tenderness • Fast growing segment of beef industry • Convenience foods • “Heat & Eat,” pre-cooked products Branding Commodities Think it can’t be done? California Wines Florida Oranges Washington Apples Idaho Potatoes Vermont Maple Syrup …requires cooperation and money. Going in Premise • Investments in value-added ventures cannot compensate for high production costs • Premiums for proposed products should NOT be assumed. Slaughter Handling Chilling Genetics Processing Option Two: World Class Niche Marketing Retail Alliance Partners Foodservice Alliance Partners • • • • • Aggressive, creative management • Close coordination with quality standards • Low cost production • Managing to market demands Co-packing relationship Producer investment Strict QC Product innovation Industrial / Export Alliance Partners INFORMATION FLOW Model for Competitive Future Integrated systems are linked by information... Start Here Procurement Procurement Marketing Marketing Farmers Farmers Commodity Commodity Processors Processors Food Manufacturers Manufacturers Food Retailers Retailers Consumers Contracts Contracts Quality Control Quality Control Logistics Logistics Market Fragmentation Must Address Multiple Niches! 1970 •Big Targets •Shotgun Responses 1980’s •Small Targets •Rifle Responses 1990 & Beyond •Niche Targets •Smart Bomb Responses How Can These Groups Succeed? Build Irresisible Systems Product Case-Ready Meat Always-Ripe Cantaloupe Anheuser-Busch store reps Sizzler Potato 2.8 pound chicken America O nline / Northstar Food Service Distributors Freemarkets O nline – realtime bidding Customer Need “ Butcher-Less” Supermarket Less shrink / greater sell Display-like shelves Foil-wrapped & stamped Precise sizing for KFC Realtime Information Access Low cost purchases Market Analysis • What is the size of this market? – Niche Products: Is the market big enough? • How fast has it grown? How fast will it grow? • Who are the major players? • How much market share is attainable? • What will be competitive reaction? Financial Feasibility — Proforma Analysis • What are costs associated with operations? • What economies of scale can be achieved by being 2x or 3x bigger? • What rate of return is reasonable? • How will business “ramp-up” to capacity? • What will it cost to buy your way into the market? • What are major financial risks? – Sensitivity Analysis • If cost of goods rises 10%, what happens to returns? Key Factors in Successful Ventures • Strong, committed leadership from producer(s) – A recognition that they are board members of a new business, and producers by coincidence • Heavy reliance on producer funding up front – Early commitments will be telling • Recognition that serious money will have to be spent on management talent and other resources before the business begins. Checklist for Success • Answer the following questions before you move ahead in direct marketing your products. If you answer yet to the majority of these question, then you are going in the right direction. Do you like working with various types of people? Are you able to manage employees? Are you willing to learn new ways of doing business? Do you have the proper sales skills to meet the needs of the consumer? Checklist for Success Have you developed short & long term business goals? Do you have financing resources for both short & long term available? Do you know who will do your accounting/ business management? Are you willing to accept the liability related to producing a safe product? Do you have a marketing plan for your product? Have you considered animal availability and supply? Checklist for Success Do you know if this is a continual or seasonal product? Are you willing to meet USDA & Public Health regulations? Where/how will the processing of your product take place? Can you merchandise the entire carcass? How will the products e distributed/transported? Pit Falls of Direct Marketing • • • • • • Possible Upfront Financial Outlay Cost/Profit Ratio of Products Lack of Marketing Skills Lack of Processing Infrastructure Liability Insurance Regulatory Requirements The Ultimate Commodity Be Innovative: The best way to predict the future is to create it! Sources of Information • Networking with other producers • Direct Marketing/ Value-added Conferences • Department of Agriculture • University OF Kentucky • Local Extension Office • Trade Publications/ Associations • United States Department of AgricultureAgricultural Marketing Service