Major Alternate Marketing Channels in the U.S. Food System 1 Allen F. Wysocki 2 1. This is EDIS document RM 002, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published March 2000. Please visit the EDIS website at http://edis.ifas.ufl.edu. 2. Allen F. Wysocki, assistant professor, Department of Food and Resource Economics, University of Florida, Gainesville, FL. Extension web page: http://webct.nerdc.ufl.edu:8900/public/WysockiExtension/index.html The use of trade names in this publication is solely for the purpose of providing specific information. UF/IFAS does not guarantee or warranty the products named, and references to them in this publication does not signify our approval to the exclusion of other products of suitable composition. The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. Introduction In this article I will focus on the major marketing channels that make-up the U.S. food system from input supplier to the consumer in our agri-food system. This article will only highlight the various channels, but upcoming articles will explore the channels in greater detail. Marketing Channels Illustrated Major marketing channels for the U.S. food system are illustrated in Figure 1. The left-hand column of Figure 1 indicates the various stages of the food system, beginning with input supplies and ending with consumption. The lines and arrows represent flows from one channel to another. Each of these stages is discussed and examples from corn marketing channels are cited. Input Supplies If one uses the analogy of seed to table, input supplies would include companies that produce and sell seed. Firms belonging to the input supply category provide products and services used as inputs into agricultural production. Agricultural Production Agricultural production consists of all firms involved in the growing/raising of food. Products created at this stage are often referred to as commodities. Commodities by definition are mass-produced unspecialized products (Merriam Webster's Collegiate Dictionary, 10 th edition, 1996). That is, products from one producer tend to be similar (undifferentiated) to products from another. There were approximately 1,911,859 farms in the U.S. as of the 1997 Census of Agriculture conducted by the USDA. This number has fallen from 2,087,759 farms in 1987. The U.S. was once an agrarian society. However, farm population has fallen dramatically over the last 100 years, and farmers account for less than two percent of the U.S. population today. Firms involved in fruit, vegetable, grain, livestock, and aquaculture are all part of the agricultural production sector. For example, Lynn Jensen, current president of the National Corn Growers Association, farms 2,500 acres of corn, soybeans, edibles, and alfalfa in Lake Preston, South Dakota. Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
Transcript
Major Alternate Marketing Channels in the U.S. Food System1Allen F. Wysocki2
1. This is EDIS document RM 002, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published March 2000. Please visit the EDIS website at http://edis.ifas.ufl.edu.
2. Allen F. Wysocki, assistant professor, Department of Food and Resource Economics, University of Florida, Gainesville, FL. Extension web page: http://webct.nerdc.ufl.edu:8900/public/WysockiExtension/index.html
The use of trade names in this publication is solely for the purpose of providing specific information. UF/IFAS does not guarantee or warranty the products named, and references to them in this publication does not signify our approval to the exclusion of other products of suitable composition.
The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean.
Introduction
In this article I will focus on the major marketing channels that make-up the U.S. food system from input supplier to the consumer in our agri-food system. This article will only highlight the various channels, but upcoming articles will explore the channels in greater detail.
Marketing Channels Illustrated
Major marketing channels for the U.S. food system are illustrated in Figure 1. The left-hand column of Figure 1 indicates the various stages of the food system, beginning with input supplies and ending with consumption. The lines and arrows represent flows from one channel to another. Each of these stages is discussed and examples from corn marketing channels are cited.
Input Supplies
If one uses the analogy of seed to table, input supplies would include companies that produce and sell seed. Firms belonging to the input supply category provide products and services used as inputs into agricultural production.
Agricultural Production
Agricultural production consists of all firms involved in the growing/raising of food. Products created at this stage are often referred to as commodities. Commodities by definition are mass-produced unspecialized products (Merriam Webster's Collegiate Dictionary, 10th edition, 1996). That is, products from one producer tend to be similar (undifferentiated) to products from another.
There were approximately 1,911,859 farms in the U.S. as of the 1997 Census of Agriculture conducted by the USDA. This number has fallen from 2,087,759 farms in 1987. The U.S. was once an agrarian society. However, farm population has fallen dramatically over the last 100 years, and farmers account for less than two percent of the U.S. population today.
Firms involved in fruit, vegetable, grain, livestock, and aquaculture are all part of the agricultural production sector. For example, Lynn Jensen, current president of the National Corn Growers Association, farms 2,500 acres of corn, soybeans, edibles, and alfalfa in Lake Preston, South Dakota.
Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
Major Alternate Marketing Channels in the U.S. Food System 2
Figure 1. Exhibit 1
Commodity Assembly
Commodity assemblers are divided into two groups: local assemblers and terminal assemblers. Local assemblers are firms that collect agricultural products from producers and then redistribute them to
other firms in the marketing channel. For example, a grain elevator company acts as local assembler when it buys corn from an area farmer and then sells this corn to a processor. Generally speaking, local assemblers do not usually change the physical form of the agricultural product although they often add
Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
Major Alternate Marketing Channels in the U.S. Food System 3
value to products by performing sorting and grading functions.
Terminal assemblers are firms that may purchase products directly from producers or from local assemblers. The distinguishing feature of these firms is that they are usually the last firm to handle products in the physical form found at the producer level. Terminal assemblers, like local assemblers, may add value to products by performing sorting and grading functions. Generally speaking, terminal assemblers are larger and tend to handle larger volumes of products than local assemblers. Terminal assemblers are often located at terminal markets that export agricultural commodities. An example of a terminal assembler would be Cargill (when it purchases corn from local elevators and/or large corn producers for sale to processors or for export to another country).
Initial Processing
The next stage in the U.S. marketing channel system is initial processing. It is at this stage that the physical form of the product is changed. The U.S. Census Bureau combines the number of all firms (initial and further processing) involved in the manufacturing of food and kindred products. There were 20,878 firms estimated to be involved in these two stages of processing in 1997. For example, Archer Daniels Midland performs initial processing when it transforms bulk field corn into high fructose corn syrup (HFCS).
Further Manufacturing
The raw farm commodity or initially processed product is changed once again or has additional value added at the further manufacturing stage. The end result is usually the product form purchased by consumers.
Food manufacturers are the most recognizable type of firms at this stage. Kraft, General Foods, and Kellogg's have been household names for years. Coca Cola Company performs further manufacturing when it purchases HFCS from ADM and converts the HFCS into Coca Cola®, the number one branded product in the world.
Wholesaling
The primary functions performed at this stage include the assembly of products produced by producers, initial processors, and food manufacturers and the distribution of these products to retailers. One difference between local assemblers and wholesalers is the nature of the products. Although wholesalers perform an assembly function, the products they distribute tend to be transformed or have had value added to them in some way or another.
In the marketing channel diagram, the wholesaling function is separated into four distinct components: integrated grocery wholesalers, non-integrated grocery wholesalers, integrated foodservice wholesalers, and non-integrated foodservice wholesalers.
Integrated Grocery Wholesalers
Integrated grocery wholesalers serve the grocery (supermarkets, warehouse clubs, convenience stores, etc.) industry as opposed to the foodservice (restaurants, cafeterias, prisons, etc.) industry.
Integrated grocery wholesalers own retail grocery store chains that self-distribute. That is, these grocery retailers are the distributor who delivers the majority of the products they offer consumers. The top 25 self-distributing retailers accounted for over 43 percent of food store sales in 1997 (Food Institute Report).
Publix is an example of an integrated grocery wholesaler. For example, a corn tortilla manufacturer such as Ortega delivers cases of corn flour tortillas to one of Publix's four warehouses. The tortillas are then distributed to over 600 Publix stores across Florida, Alabama, Georgia, and South Carolina.
Non-Integrated Grocery Wholesalers
Non-integrated grocery wholesalers are distributors who, in general, do not own the retail grocery stores they service. Although it is common for non-integrated grocery wholesalers to own a small percentage of the retail grocery stores to which they deliver, their focus is on serving independent grocery stores. In 1997, there were approximately 97 non-integrated grocery wholesale/retailers in the U.S.
Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
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This number is down significantly from 366 in 1985 (National Grocers Association).
Super Valu is an example of a non-integrated grocery wholesaler. A corn tortilla manufacturer such as Ortega delivers cases of corn flour tortillas to one of Super Valu's 30 full-line distribution centers. The tortillas are then distributed to 6,100 independent grocery stores across the U.S. from Super Valu warehouses.
Integrated Foodservice Wholesalers
Integrated and non-integrated foodservice wholesaler sales were expected to reach a combined total of $371.6 billion in 1999, according to Technomics, Incorporated, a Chicago-based research and consulting firm.
Integrated foodservice wholesalers own self-distributing retail foodservice operations. That is, these foodservice retailers are the distributors who deliver the majority of the products they offer consumers.
Shoney's is an example of an integrated foodservice wholesaler. A corn tortilla manufacturer such as Ortega delivers cases of corn flour tortillas to one of Shoney's three warehouses. From these warehouses, the tortillas are delivered to each of the 1,200 Shoney's restaurants located in 28 states across the Midwest and Southeast United States.
Non-Integrated Foodservice Wholesalers
Non-integrated foodservice wholesalers are distributors who do not own the retail foodservice establishments they serve. Their focus is on serving independent and chain foodservice establishments such as fast food restaurants, family restaurants, schools, corporate feeding programs, etc. In 1998, there were more than 5,000 foodservice distributors in the U.S. (Food Marketing: An International Perspective). The largest 50 firms were responsible for approximately 30 percent of all sales in 1998.
The largest non-integrated foodservice wholesaler in the U.S. is Sysco Food Services, with 1999 sales exceeding $17 billion (1999 Sysco Annual Report). Sysco has over 78 distribution warehouses located across the U.S. and Canada. Sysco purchases
corn flour tortillas from a company like Ortega and re-sells and delivers them to local Mexican food restaurants.
Retailing
Retailing is the stage in the U.S. food system where firms come into direct contact with the final consumer. Firms at this stage add value by assembling and offering an assortment of products from producers, initial processors, food manufacturers, and wholesalers. Cases of products are broken down and sold by the unit to customers. Savvy retailers increasingly bundle food products into meal solutions to satisfy time-starved customers.
Total retail food sales were estimated to be $573.0 billion in 1997 (Food Institute Report). In this newsletter the retailing function has been separated into three distinct components: retail food stores, foodservice outlets, and specialty retailers.
Retail Food Stores
According to the Food Institute Report, there were approximately 29,000 retail food stores in the U.S. in 1997. Retail food store formats include, but are not limited to, super centers, wholesale clubs, traditional grocery stores, and limited assortment stores. In 1997, there were approximately 46,000 convenience stores that sold grocery items alone and an additional 36,750 convenience stores that sold gas as well as grocery items.
Returning to the tortilla example, a grocery store such as Hitchcock's Foodway will order Ortega corn flour tortillas from the warehouse (Super Valu in this case) to place on its shelves for consumers to purchase.
Foodservice Outlets
The term foodservice outlet is a catch-all phrase used to describe firms that prepare food and meals for consumption away from home. Examples of firms operating in this segment include, but are not limited to, restaurants of all types, cafeterias, prisons, hospitals, nursing homes, universities, camps, resorts, hotels, and food vending companies.
Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
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There were over 385,000 restaurants in the U.S. in 1997 (Technomics, Inc.). By 1999, Americans spent an average of 46 percent of their food dollar (Food Industry Review 1999) on food away from home. For example, your favorite Mexican-style restaurant could very well be serving Ortega corn flour tortillas shipped to them by their integrated or non-integrated foodservice wholesaler.
Specialty Retailers
Specialty retailer is a name assigned to those food retailers who tend to specialize in a limited assortment of products and offerings to their customers. The most common examples include the local butcher shop and the local produce/fruit stand. If the specialty retailer is known for its Mexican cuisine, it is possible that customers could pick up their favorite Ortega corn flour tortillas along with fresh guacamole.
Consumption
There were approximately 269 million Americans in 1997. Therefore, in 1997, each American consumed, on average, 81 pounds more commercially-grown vegetables; 65 pounds more grain products; 57 pounds more fruit; 32 pounds more caloric sweeteners; 13 pounds more total red meat, poultry, and fish (boneless, trimmed equivalent); 17 pounds more cheese; 13 pounds more added fats and oils; 3 gallons more beer; 70 fewer eggs; 10 gallons less coffee; and seven gallons less milk than in 1970.
Retail food prices, as measured by the Consumer Price Index (CPI), increased 2.6 percent in 1997. Food price inflation in 1997 was higher than the overall increase in the CPI for all goods and services (2.3 percent) for the third consecutive year. Americans spent $715 billion for food in 1997 and another $95 billion for alcoholic beverages. Away-from-home meals and snacks captured 45 percent of the U.S. food dollar in 1997, up from 39 percent in 1980 and 34 percent in 1970. The percentage of disposable personal income spent on food declined from 13.8 percent in 1970 to 10.7 percent in 1997 (Food Consumption, Prices, and Expenditures, 1970-1997). An upcoming newsletter will be devoted exclusively to consumers.
Importing and Exporting
The import and export boxes in Figure 1 are designed to show that both imports and exports are part of the U.S. food marketing channels. For example, the U.S. exported approximately 193,735 million metric tons and imported approximately 5,290 million metric tons of sweet corn in 1997 (USDA).
Conclusion
This article gave a brief overview of the various marketing channels in the U.S. food system. Although each marketing channel was presented as a distinct and separate entity, vertical coordination takes place at various levels and in varying degrees. For example, Publix purchases raw milk from a Florida dairy cooperative. At the Publix dairy plant, this raw milk is transformed into various dairy products, including fluid milk, cottage cheese, yogurt, and ice cream. These products are then shipped to one of 600 Publix grocery stores located across the Southeast. In the case of dairy products, Publix operates at the local and terminal assembler, manufacturing, wholesaling, and retailing stages of the food system.
Your comments and suggestions are always welcome and you may email me directly at [email protected] or respond via my extension web page at http://webct.nerdc.ufl.edu:8900/public/WysockiExtension/index.html. As the need arises, I will post and respond to reader comments and questions regarding wholesaling and retailing.
References
1997 Census of Agriculture. U.S. Department of Agriculture. http://www.nass.usda.gov/census97.
1997 Economic Census. U.S. Census Bureau, Department of Commerce. p. 1-595. http://www.census.gov/main.
The Food Institute Report. Various issues. A newspaper published 51 weeks each year by the American Institute of Food Distribution, Inc., Fairlawn, NJ. http://www.foodinstitute.com.
Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.
Major Alternate Marketing Channels in the U.S. Food System 6
Putnam, Judith Jones and Jane E. Allshouse. Food Consumption, Prices, and Expenditures, 1970-97. Food and Rural Economics Division, Economic Research Service, U.S. Department of Agriculture. Statistical Bulletin No. 965
The Food Institute Review. Various issues. A newspaper published 51 weeks each year by the American Institute of Food Distribution, Inc. Fairlawn, NJ. http://www.foodinstitute.com.
Schaffner, David J., William R. Schroder, and Mary D. Earle. Food Marketing: An International Perspective. Boston, MA: McGraw-Hill. 1998.
Grocery Distribution, a trade magazine serving the grocery industry.
National Corn Growers Association Website http://ncga.com.
National Grocers Association Website http://nationalgrocers.org.
