No Margin, No Mission:
Essential Learnings from the NGFN Food Hub Conference, ATL, 2016
Last month our CEO and I were lucky enough to attend the NGFN Food Hub Conference 2016, hosted at the W Hotel in mid-town Atlanta. Over the course of 3 days, we rubbed shoulders with representatives from the USDA, Atlanta’s Mayoral Office of Sustainability, the National Good Food Network, and stakeholders of every kind in the local food supply chain. We attended workshops, listened at round-table discussions and conducted our own interviews with Food Hub operators and board members, all with the goal of truly understanding the barriers to success Food Hubs face.
We learned about the various types of Food Hubs — from non-profit publicly supported hubs, to for-profit LLCs, to CSA-based co-operatives — and discovered a pattern:
Regardless of a Food Hub’s legal designation, each has a lack of access to easily read, easily explained real time data about their business.
This got us thinking: since we’ve already built two products for streamlining food business operations, could we combine them to create a super-product for Food Hubs, and would it be valuable? To find out, we hired some very smart statisticians to look at the numbers behind Food Hubs in America.
Here are some bare-bones facts from our own study:
- Currently, there are over 350 Food Hubs operating in the United States. 20% of these Hubs are located in 3 states: New York, Virginia and California.
- The big end of 50% of all Hubs (50.6% to be exact) operate as for-profit businesses.
- The average break-even sales figure for a food hub is $3M per year. One-third of all hubs in America require outside funding to continue operations.
- Even when a hub reaches sustainability, the average net profit margin is 1.7%.
- The average age of a for-profit Food Hub is 11 years. The average age for the non-profits is 7 years. Most importantly, across every age group, the number of Food Hubs is increasing — except for those aged 11–15 years. Why this is so important will become clear in just a moment.
According to our study, the failure rate of Food Hubs from the 10th to 11th year of operation is 28%. There are almost no non-profit Food Hubs that have been operating for more than 10 years.
The story here is that between years 7 and 10 of operation, a Food Hub had better learn how to turn a profit
— or at least make ends meat without grants and subsidies — or face a daunting likelihood of failure.
This is not to say that for-profit Hubs have an easier time. Across the board, when looking at the success-rate of Food Hubs, year by year their chance of failure increases 50% past their 2nd year. For example, the 2015 National Food Survey reports a total of 149 respondents to their Food Hub survey (up 46 respondents from 2013).
Seems fine: a one-third increase in over-all Food Hubs in operation.
However, look at the graph above:
- the number of Hubs operating more than 6 years are less than half the number of Hubs operating 3 to <6 years.
- Hubs making it 11 to <16 years are again less than half.
It would seem, from looking at the data, if you can make it to 16 years in operation, you’re in the clear. But first you have to figure out how to make it past year 3 before you start focusing on year 16.
So what is the difference between just making it to year 3, and building a successful business?
Here’s something else we learned in Atlanta: just about everyone working in or on a Food Hub is doing so for the same reason. It’s a moral calling; you don’t get into sustainable food for the sole purpose of getting rich. Yet, for too many people involved in local food systems, satisfying their singular need to feel like they tried something, anything, to answer that call — regardless of success of failure — is enough. That is to say, it’s very important to have a moral basis for your work, but we also know that morals don’t pay bills. No matter how hard you hug the earth, you won’t squeeze a dime out of her unless you know how to run a business.
In short, here’s the basics:
Operational Efficiency
We’re not suggesting you need a MBA to operate a Food Hub. That is a ridiculous thing to say. More important than specific business knowledge is general operational knowledge. Operational efficiency is probably the most important aspect of any business, but the effects of being poorly organized — at any level — are felt more immediately in a business that involves physically storing and shipping perishable products (food).
From the moment you, as a Food Hub operator, first touch a product, to the moment it leaves your possession, you are responsible for everything to do with it. Everything from the farmer’s reputation to the restaurant guest’s satisfaction with a meal, is in your hands. Is that a responsibility you want to leave up to an overflowing filing cabinet?
This is the essence of operational efficiency: knowing that at every moment the products you are representing are being moved, with minimal touches, from their origin to their destination; and, that only the exact number of products needed are being moved. Maximize efficiency in this area and save a magnitude of money. Proper operational efficiency could be the difference between failure in year 4 and a multimillion dollar operation in year 20.
Established Clientele
When we discussed building our food hub product we recognized immediately that the most basic need of any hub is customers. In fact, maintaining an established clientele is so fundamental, I can’t think of an appropriate metaphor to further emphasize its importance. “It’s cheaper to keep a customer than it is to find a customer,” is such a foundational statement that I heard it from the manager at the pizza-joint franchise I worked at when was 16. The best way to keep customers is to not give them any reason to leave, and pat them on the back for giving you their business. Your Food Hub customers should feel like genius-gods for purchasing their lettuce from you, and it should be so easy for them to replicate that feeling that they can’t stop buying that lettuce from you. And since you’re in the middle, you can’t forget your suppliers. They have to know that the genius-god feeling the Food Hub customers are getting is all thanks to the hard work and care they put in to raising that lettuce. This level of customer understanding and communication will be the focal points of our hub product.
Solid Business Practices
It should be clear that you can’t survive without efficiency and clients. Unfortunately, you can survive for quite a while without establishing good business practices. Luckily, there are many successful Food Hubs that can be emulated by newly established hubs. Find a great organization you believe in and learn about it. Emulate your business heroes and heroines — or go out and establish some if you have none. At the same time, disassociate yourself from businesses you don’t like. Even efficiency, if it’s customer-facing and cold-hearted, can be bad for your business. You wouldn’t want to be known as the Soup Nazi Hub. (That’s a Seinfeld reference to anyone under 25 who might be reading this.)
There are many ways to establish good business practices, including operational efficiency and an established clientele. It seems the favoured way of developing such practices is by stumbling around hoping for the best. This is a terrible idea, but still one that can work, especially in an industry bolstered by the sheer volume of good-will it can trade on. No one wants to see a Food Hub fail. Having one in the area is good for everyone. But even the good-will generated by a Food Hub that pumps money back into the local economy can run out. In an industry with margins as slim as 1.7%, you just can’t rely on good-will and grants to keep the lights on. Perhaps the best way to develop good business practices is to straight up adopt a proven method of doing business. Try to find one that encompasses features for enhancing operational efficiency, payment processing for buyers and suppliers, and a way to gauge the demand for an item in your inventory, and the supply available to meet that demand.
So, what are your options?
It’s true, there are many options available to a Food Hub if they wish to adopt a proven system for running their business. We heard one particular story of an organization paying more than $75 000 to have a proprietary system built. Based on parameters that have worked for other businesses, but “customized” to your specific needs, such a system could be available for use in months — if you have the time to wait, and the cash to pay up front. There are systems available that are cheaper, and just as efficient and pleasant to use as an over-flowing filing cabinet. A lot of those systems have been around for a long time, and they look their age. It’s 2016, does anyone really need system updates on CD-ROMs mailed to them anymore? The point here is there’s a system for everyone.
Local Line happens to be the system for people that want full-customizability of their business operations within a software, without having to drop an entire year’s net sales to pay for it. Local Line is also the system for all food businesses ready to improve their practices today. No waiting, no wondering. We don’t just take your overflowing filing cabinet and put it online — we organize, analyze, and make you more money.
Achieving Margin and Mission
We learned a lot in Atlanta. We met a lot of people with their hearts in the right place, ready to hoist the banner of the new social initiative that is the food hub industry. That means we’re 50% of the way there, because we equally realize it’s those few who are host to both a good heart and a great mind that truly change their industry.
Our mission at Local Line is to build the infrastructure for the strongest, most efficient local food economies, and over the past month we’ve come to recognize food hubs as a critical part of tomorrow’s local food systems- which is why we’re officially building a dedicated product to improve their businesses.
We need Food Hubs to accomplish our mission, and Food Hubs need Local Line to run better businesses.
