Developing a model for evaluating marketing expense for value-added products that can be used to more intelligently price core products

Final Report for ONE03-008

Project Type: Partnership
Funds awarded in 2003: $9,105.00
Projected End Date: 12/31/2005
Matching Non-Federal Funds: $14,000.00
Region: Northeast
State: Pennsylvania
Project Leader:
Drew Keegan
Pennsylvania Preferred
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Project Information

Summary:

Producers who sell to premium restaurants and other high-margin outlets can sometimes find themselves overstocked and needing to sell excess product, often by adding value. The project leader will gather and analyze data from cooperating farmers specific to the added marketing expense associated with the sale of these value-added products and gauge the impact on overall profitability. Presentations before the Pennsylvania Department of Agriculture and Cooperative Extension will disseminate the results to others.

Project Objectives:

The objective for this entire project is a method that will help growers estimate the cost of marketing “secondary” products when a “glut” is created due to an increase in sales of a “primary” product.

Farmers, particularly those raising animal products, who have made the decision to sell directly to the end user are faced with this question on a regular basis. All too often the demand for a prime cut can lead to an excess of secondary cuts. Or, a demand for a product that might be seen as a commodity can be affected by the ability of a producer to meet a price. In order to meet the price expectation of the market it is vital that a producer have a secondary outlet that provides the profit margins needed to remain viable. For many farmers food raised oversees that can reach the market at a fraction of the price demanded by domestic producers can destroy the profitability of a crop.

What this project aims to do is help the small farmer devise a strategy that will deal with this paradox: protecting their profitability in the face of increasing business. Our two partners in this project, Country Time Farm and W. J. Aquaculture represent two distinct scenarios that can affect the small producer. Country Time is expanding their direct sales to local restaurants while finding themselves challenged to move the secondary cuts. W. J. Aquaculture is selling most of their tank-raised tilapia live to one or two select distributors who cater to Asian restaurants. Increasing production, his logical next step means increased sales to this niche and creates additional dependency that can be a problem when the price of off-shore tilapia falls dramatically and the demand falls. What the producer needs to develop customers among non-Asian restaurants in order to insure against a temporary dip in the live fish sales.

The proposed solution to each is the creation of a “value added” product that will allow the producer to establish an alternative revenue stream to that from the current product line. But what is the cost of this new line? And what does it cost the farmer in terms of added marketing expense when an increase in sales of the “primary” product leads to a need to increase sales of the “secondary” product? And should part of this expense be passed along to the buyer of the “primary” product?

Research

Materials and methods:

In order to address this question five steps were established:
Determine what “value added” products are viable
Determine the outlets open to the growers
Develop the marketing test plan
Assess the impact of marketing expenses and
Report the findings

Research conclusions:

 Over the past several months the project has begun to resolve the initial questions of 1) what value added products made sense for the producers and 2) where would these value added products best be sold.

 Country Time Farm – Much of what Country Time sells to their restaurant accounts are ribs, chops and loin cuts. Making the secondary cuts – shoulders, butts, etc – means creating a product that can appeal to consumers. Since the producer is still processing less than 20 hogs per month the current focus is to develop a market that sells in the neighborhood of 500 lbs. of pork, though this number is expected to rise in 2004. Recognizing consumer interest in simplifying meal preparation we have tested a marinated product. The product will include Annie’s Naturals marinade. Annie’s is an all-organic line of marinades and flavorings that is a great compliment to the special handling that Paul and Ember Crivellaro give to their product, an antibiotic-free meat with absolutely no additives.

 A second “value added” product is a nitrate-free frank.

 First off, Annie’s Naturals was approached in October with the proposal for Country Time to identify the Annie’s Naturals product by name in their packaging. An agreement was reached in November that allowed Country Time to 1) label the marinated products as containing Annie’s Naturals; 2) to purchase the product in bulk. Labels were developed and approved by Annie’s Naturals in late November.

 A label was developed for each of the value added products that allows the Country Time products to stand out o the shelves. And a Web site is being developed for Country Time Farm.

 Finally it was decided that given the quantity of product available and the nature of the product that the best outlets for both the hot dogs and the marinated pork might be health food stores. There are three stores that have agreed to carry the value added products and participate in our marketing test.

 W. J. Aquaculture – WJA is in the unique situation of having an amazing product that is so superior to the competition that it is almost not comparable to other tilapia. As good as this product is it is still regarded as a “commodity” by the current customers, New York and Washington distributors who purchase whole live fish for resale to Asian restaurants. And these distributors have shown a tendency to purchase from an alternative source when the price shifts radically. As an example, WJA has seen price competition from off-shore producers that deliver a filleted fish for sale at a cost LESS than he can deliver a whole, live fish. But the distributor invariably returns to WJA, though in the interim fish – and revenue – can be lost.

 WJA has just about perfected their process and is poised for a dramatic expansion in production. It will need to increase sales to these two buyers but that will only increase their dependence on what has proven an “interruptible” outlet. For this expansion to succeed it is important that the producer have clients for whom this fish is seen as truly value added.

 Over the past few months efforts were begun to explore alternative markets for this product. At present it is becoming apparent that this product, iced and packaged properly can appeal to restaurants. Selling at what can be as much as 2 or 3 times that of the competition, but justified by the superior quality of the product special packaging was developed to reinforce the special nature of this fish. This includes a new label, a Styrofoam container and special imprinted sealing tape. When a 25 lbs package of WJA tilapia arrives at a restaurant it is sure to stand out!

 The effort to secure new accounts has just begun. At present there seem to be at least 6 viable accounts though this won’t be confirmed until later in January.

Participation Summary
Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.