Market research for agroprocessors (2024)

Main points in Chapter 5
How should yourproduct be distributed?

Agroprocessors have a number of options fordistributing their products. Market research can identify the mostappropriate.
Distribution can be ...

• direct to consumers, which may be a suitable option for smaller processors covering small areas;
• to all suitable retailers in an area;
• to supermarkets, if they find the product acceptable and sufficient quantities can be delivered;
• to wholesalers, suitable for larger processors;
• to institutions and the catering trade.

Factors to be considered in deciding on the marketingchannel(s) to use include ...

• quantities processed and quantities required by distributors;
• transport arrangements;
• margins and mark-ups;
• payment arrangements.

When deciding on which retailers to supply, you must besure that you can keep their shelves stocked at all times

POSSIBLE DISTRIBUTION CHANNELS

By now you should have covered the issues related to theproduct and to the potential consumers. You have surveyed the market size andconsumer tastes and identified those categories of consumer likely to buy yourproducts. You have decided on the packaging and unit sizes. You have chosen abrand name and identified what needs to be printed on the packets or labels. Youhave found out what prices competitors’ products are being sold at toconsumers and what the shops are paying for them. With this information you haveconcluded that you may be able to sell your products profitably. However, youstill need to consider how the items you produce are to get from your processingfacility to the consumer. This requires further research. Possible distributionchannels are selling:

• directly to consumers;
• to retailers;
• to supermarkets;
• to wholesalers;
• to institutions and the catering trade.

Selling directly to consumers

This can be done from a small shop, usually attached to theprocessing facility, or at the local retail market. It is usually only an optionfor very small-scale processors although, in some countries, medium andlarge-scale producers do sell directly to consumers by using mail order or teamsof door-to-door salespeople. The advantages of selling directly are:

• you can keep thefull retail selling price and do not have to pay the margins of wholesalers andretailers;

• in other retail shops yourproducts will just sit on the shelves waiting for someone to buy them, but inyour own shop you can actively “promote” your products;

• you may not have to providepackaging for some types of product;

• you have few transportproblems;

• you can talk to your customersand find out what they think about your products. They may even suggest ways inwhich you can improve them.

On the other hand, if you are going to sell directly toconsumers you will:

• have to do ityourself, in which case the time you have to spend selling is not available toyou for processing. This limits how much you can produce and your ability toexpand your business; or

• have to employ someone to sellfor you. Unless you are confident of selling a large number of products in ashop or market, for example if your shop is on a busy main road, this may costyou much more than paying the margins of the shopkeepers;

• have trouble expanding yourbusiness, as selling in just one or two locations limits the total quantitiesyou can sell.

Selling to retailers

The advantages of using shops to sell your productsinclude:

• you can sellgreater quantities because your products are on sale in many more locations thanif you were doing your own marketing;

• you can devote most of yourtime to processing, which is what you are best at.

  See Also

  Importance Of DistributionDistribution Management in Businesses | LOCADRetail Distribution Strategy: Sell Where Your Customers Shop - ShopifyThe five principles of retail

Offsetting these benefits are the facts that you do notreceive all of the retail selling price and that you have to organize transportof your products to the retailers and ensure that they do not run out ofstock.

Selling to supermarkets

Supermarkets are a particular type of retailer. Some areindependent companies with just one or two shops. These can be considered aslarge retailers and you can usually distribute to them as you would to otherretailers. However, supermarkets are often part of a large chain. Sellingproducts through such chains can cause considerable problems for small andmedium-sized processors.

Reasons include:

• supermarket chainsare often reluctant to sell other than popular, well-advertised brands and,occasionally, their “own brands”. They give priority to brands with ahigh turnover;

• chains often require theirsuppliers to supply all their shops and may specify minimum quantities, whichcan be difficult for smaller processors;

• chains may require deliveriesto a central warehouse, which may be a long way from the processingfactory;

• chains can sometimes be veryslow to pay!

Selling to wholesalers

In your discussions with retailers you need to find outwhether there are wholesalers operating in your area and, if so, who they are.You can then contact the wholesalers to find out which areas they supply and toobtain other important information, as discussed below. The advantage of workingwith a wholesaler is that you usually only have to make one delivery to onelocation. For example, you may be able to make a delivery to a wholesaler once aweek, for which you could hire a vehicle and driver for a few hours. Supplyinglots of individual retailers who are spread out over a large area may mean thatyou have to operate your own vehicle every day, which can be costly. Anotheradvantage is that wholesalers visit, or are visited by, a large number ofretailers and are thus able to give your products much greater exposure and sellthem over a wider area than you could do on your own.

The disadvantages of using wholesalers are that they mayrequire large minimum quantities that may be difficult for you to supply. Also,of course, they need to make a profit from their activities and need to take amargin. This further reduces the share of the retail selling price available toyou.

Your sales need not only be throughshops.
Restaurants and fast food restaurants may also be possibleoutlets for your products.

Selling to institutions and the cateringtrade

For ventures that are neither very small nor large enough tofinance an expensive promotion campaign, selling to institutions can be anattractive option. Institutions, such as schools, hospitals, prisons andmilitary bases, can be supplied under fixed agreements which permit you to knowin advance how much you will sell. Also, if you can supply institutions you donot have to worry about promotion. One drawback is that governments are oftenvery slow to pay their bills. However, you should certainly visit all theinstitutions in your area to see if they are interested in yourproducts.

Similarly, you should survey restaurants and fast food outletsto identify their requirements for processed foods. The questions you need toask are very similar to those you would ask retailers.

DECIDING ON THE CHANNEL OR CHANNELS

This should be discussed carefully with retailers andwholesalers. Combining some limited direct sales with sales to retailers shouldcause few problems. For example, for a small dairy it should be possible to sellmilk and dairy products directly to consumers in your village as well assupplying retail shops in neighbouring villages. Combining sales to bothretailers and wholesalers may be possible, but it may also cause problems. Insome cases, for example, very large supermarkets may not want to deal withwholesalers and will expect you to deliver direct to their shop(s) orwarehouses. Even small shops may prefer to get all their supplies from onewholesale source, in preference to dealing with individual small suppliers.Where there is more than one wholesaler in an area, each may demand soledistribution rights for that area. This means that for one of them to agree tostock your products you have to agree not to supply retailers and otherwholesalers. No wholesaler will want to do business with you if you also want tosupply retailers directly, unless you have a clear agreement from the beginningabout which retailers you can supply.

During your discussions with wholesalers and larger retailersyou need to find out what conditions they will attach to selling your products,as discussed below. On the basis of this information and an understanding of themark-ups that particular retailers and wholesalers require, you can begin towork out which channel, or combination of channels, is likely to suit you bestin terms of maximizing the sales you can make at prices that will beprofitable.

DELIVERING YOUR PRODUCTS

Wholesalers and retailers may not have much storage spaceavailable. Very small retailers, for example, may only have the space they usefor selling to consumers, with no additional storage room. In such circ*mstancesthey will not be happy to sell your product if you only want to deliver once amonth, as they have nowhere to keep it. Also, they probably have problems inpaying for a month’s supply in one go. They may ask for weekly deliveriesor, if you insist on delivering once a month, require you to offer them creditfor that period, so increasing your costs.

When you are delivering non-perishable items to smallretailers in urban areas you can agree to sell them quantities that reflect whatthey sold in the previous week. For example, if a small retailer normally takestwo cartons of your potato chips but didn’t sell many in the previous week,you, or your salesperson, can deliver one carton instead. This clearlydoesn’t apply to rural areas as you may drive 20 km to a shop, only to findout that it wants nothing! When your products are perishable, particularly whenyou have to make deliveries on a daily basis (e.g. milk), you want to be surethat you can sell everything you produce. You need to discuss with retailerstheir willingness to take delivery of an agreed quantity every day. Without suchan arrangement you could face big problems in disposing of thesurplus.

Many shops can only take small quantities at a time...
... be careful not to oversupply them.

If your research makes you believe that it would be uneconomicto supply small shops directly, or if you find that small shopkeepers buy alltheir supplies from wholesalers, then you have to look at the deliveryrequirements of larger stores and/or wholesalers. It is important to note thatsupermarkets do not like to have empty shelves and wholesalers do not like totell their retail customers that they are unable to supply a particular item.You need to be sure that you can supply the minimum quantities that theyrequire. If you start delivering to a supermarket or to a wholesaler and areunable to continue to supply the agreed quantities, then those buyers areunlikely to want to buy from you again. If you later increase your productioncapacity so that you can meet their minimum quantity requirements you will havea lot trouble persuading them that you are reliable.

Supermarkets and wholesalers do not like having“old” stock even if it is not past its “sell-by” date. Thus,for some more perishable products they may insist that every time processorsmake a delivery they take away any unsold stock, even if it has not reached its“sell-by” date. This can mean a considerable cost for agroprocessors.Under these circ*mstances you will need to be careful that you only supply suchcompanies with quantities they are likely to be able to sell.

Shipment or distribution containers

By “shipment or distribution containers” we referhere not to the packs or containers that go on the retailers’ shelves (seeChapter 4) but to the packaging in which those containers are delivered. Youneed to find out what sizes of carton, sack, bag, barrel, etc. your competitorsare using and whether the wholesalers and retailers are happy with these.Remember that the containers you use should not be too large, particularly ifyou plan to supply small shops, or wholesalers who sell to small shops. Innorthern Iraq, for example, one factory ran into problems because it wassupplying retailers with cartons containing 15 cans of tomato paste. Competingfactories were all supplying six cans per carton.

In deciding on the size of the containers to use, you need torefer to your estimates of the quantities different types of retailers arelikely to order (see above). Wholesalers usually prefer to deliver to retailersin the packaging that the producers provide. Therefore, the number of units youprovide per carton, etc. must be consistent with the quantities retailers aregoing to want to buy at any one time. For example, very small retailers who selleight or nine cans of pineapple every week will probably want to buy either oneor two cartons containing six cans every week. They will not want to buy acarton containing 36 cans.

Transporting your products

Having decided to where you want to deliver your products andhaving learned of the requirements of those you hope will buy from you, you nowneed to identify your transport requirements. As noted above, if you think youwill have to supply a large number of small retailers with daily or weeklydeliveries, you may need to buy and operate your own vehicle. On the other hand,if you intend to supply just a few large shops or one or two wholesalers you maybe able to make arrangements with a local transporter to deliver your productsonce a week.

It is important to make a detailed study of your transportcosts. Although supplying small retailers may be your preferred method ofdistribution you may find that the costs of supplying small quantities to someor, indeed, all small retailers are so high that the prices you have to chargewill mean consumers will not want to buy your product.

In your discussions with wholesalers and/or large shops youshould find out at what times they accept delivery. Some, for example, may onlyreceive goods between certain hours or on certain days. You also need toidentify the delivery procedures. Does the wholesaler assist with the unloadingor does the company expect you or your transporter to unloadeverything?

Once you have all this information then you can approachtransporters in your area to find out whether they can provide the service yourequire at the times you require it. You can also get some idea of the likelycosts. Transport for food products must be sanitary, covered and preferably onlyused for food products.

PRICING, MARGINS AND MARK-UPS

This subject requires detailed discussion with potentialcustomers. The ways in which you can work out your selling price are discussedin Chapter 8. However, at this stage of your research you need to find out fromwholesalers and retailers what their approaches to pricing and margins are. Youneed to get as much information as possible about the prices that wholesalersand retailers presently pay for those brands that would compete with yourplanned products, and the mark-ups they apply. You need to discuss whether theywould pay the same prices and apply the same mark-ups for your products orwhether they would expect to pay less and charge higher mark-ups because theywould be taking a risk by stocking new products. Figure 4 illustrates theconcept of margins and mark-ups.

The price that wholesalers and retailers are prepared to payand the mark-ups they require are likely to depend on several factors.

Some of these are:

• speed with which the product is sold;
• quantities that can be sold;
• range of products to be stocked;
• the strength of the manufacturer;
• the strength of the retailer.

Speed with which the product is sold

If businesses expect to stock products for a long time beforeselling all of them, then they require higher markups. Low mark-ups are requiredfor products shopkeepers are sure they can sell quickly (e.g. carbonateddrinks).The more often shopkeepers can buy and sell, the more profit they canmake.

Quantities that can be sold

Wholesalers and retailers often accept a lower mark-up forproducts that can be sold in large quantities. This may be a condition imposedon them by the manufacturer, but they may also find that lowering the price canincrease overall sales and, hence, their revenue.

Range of products to be stocked

The range of products is a factor contributing to the speedwith which they are sold. Shoe or clothing retailers, for example, have to stocka large number of items so they have available the style and size that everyonewants. They therefore expect higher mark-ups.

Figure 4
Margins and mark-ups

From the above it can be seen that the “margin” iscalculated with reference to the final selling price. It is the percentage ofthe retail selling price retained at each stage of the marketing chain. The“mark-up,” on the other hand, is calculated with reference to thebuying and selling prices at each stage of the marketing chain. It is thepercentage difference between the price a company pays for a product and theprice it sells it at. Thus, in the example above, the retail margin is [(120-90)÷ 120] × 100 or 25 percent, while the retail mark-up is [(120-90)÷ 90] × 100, or 33 percent. The concept of “margin” isuseful when you are looking at the profitability of your business. However, indealing with shopkeepers you will nearly always be discussing their“mark-ups,” i.e. by how much they want to increase the price whenselling your product.

The strength of the manufacturer

Larger companies, particularly those with well-advertised andwell-known brands, can often negotiate very favourable arrangements withdistributors. Some brands are so famous that shopkeepers have no alternative butto sell them if they want to attract customers. In this situation themanufacturers can often dictate the maximum retail selling price, and hence themark-up, although in some countries this practice is illegal. Smallagroprocessors, on the other hand, are in a position of some weakness whennegotiating with distributors, particularly when there are several othersuppliers of the same product.

The strength of the retailer

Large supermarket chains are extremely powerful in manycountries. They sell a high proportion of foodstuffs and are able to buy frommanufacturers at very favourable prices. As a result they can retail theproducts at prices much lower than can smaller retail shops and chargeprofitable mark-ups. Even in rural towns, a large supermarket is in an extremelypowerful buying position in dealing with a local agroprocessor, because of thequantities it can purchase.

TERMS AND CONDITIONS OF PAYMENT

This is an extremely important subject. Payment terms andconditions can make the difference between profitability and bankruptcy,particularly in countries with high inflation or high interest rates. If youhave to wait for payment from the businesses that you supply you may:

• have to delaypayment to your suppliers, for example the farmers or wholesalers who sell youthe raw materials;

• have to borrow money from thebank to pay your suppliers and staff; or

• have to use your own money topay your suppliers and staff when it could be in the bank earninginterest.

All over the world companies that are basically profitableoccasionally run into “cash flow” or “liquidity” problems.This means that what they must pay out to their suppliers is not being matchedin the short run by what they are receiving from their customers (if it is notmatched in the long run they will, of course, go bankrupt). This is discussed inmore detail in Chapter 8.

Small retailers may pay in cash when you deliver to them.Larger shops, supermarkets and wholesalers, on the other hand, almost certainlywill not. They normally expect you to post them an invoice and undertake to paywithin a certain period. In some cases this period can be up to 90 days. Youneed to clarify with these businesses the exact length of credit they require.It is also a good idea to check with existing suppliers to wholesalers or shopsin order to find out whether those businesses do in fact pay within the agreedperiod. When a company is very slow in paying there is little you can do aboutit. You can stop supplying the company but taking legal action will often costmore than the sum you are owed.

REACHING CONCLUSIONS

You should now have a good idea of the channels that arelikely to be the most profitable for you. Such information shouldinclude:

• the advantages of selling direct to consumers compared with through distributors;
• the benefits of supplying retailers direct compared with wholesalers;
• the advantages of selling to caterers, small retail shops or to large supermarkets;
• how to deliver products, when and in what quantities;
• pricing and payment arrangements.

You can then make some informed conclusions, suchas:

• the quantities oforange juice I shall produce will be too small for wholesalers and the localsupermarket chain to handle. I shall have to concentrate on supplying smalllocal retailers and one or two restaurants and fast food shops;

• I can deliver my weeklyproduction of tomato sauce to the wholesaler in one morning, using a hiredtruck. Delivering to retailers will take five days a week. I need to calculatewhether the cost of delivering to retailers is greater than the margin I willhave to give the wholesaler.

• I can produce sufficient jamto supply my local supermarket chain. Although this company will pay less thansmaller retailers, I can deliver to all its shops on one day in a week and mycosts will be much less. The local wholesaler requires larger quantities than Ican supply.