Modified Copy Of Agri-sector Distribution

Using models of consumer buying behaviour, sketch out at least three distribution channels for the agricultural sector. How does each of these channels meet distinct customer needs? And how does this compare with service delivery channels in the service industry?

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Introduction and Project Background Agricultural marketing is the performance of all business activities involved in the flow of goods and services, from the point of initial agricultural production until they are in the hands of the ultimate consumer (Kohls and Downey 1972). In the last four decades, there have been several substantial changes in the patterns of production, consumption, and trade in agriculture. One is the shift in production and consumption from grains and other starchy staple crops to higher-value agricultural commodities as meat, milk, eggs, fish, fruits, and vegetables. Another is the growing importance of agricultural marketing channels, including the expansion of agroprocessing, large-scale retail (e.g. supermarkets), and food services industries (e.g. restaurants), all of which create a need for various forms of vertical coordination.

The coordination and integration of the sector is enhanced by the presence of strategic distribution systems and processes. Channels provide the basis for bridging the gap

between the producers and consumers. Basically it enables the right products to the right consumers at the right price to the right place. The importance of channel decisions has not always been recognized. For a long time, agricultural marketers only gave thought to appropriate channels of distribution after the development of the product. Based on information gleaned, various methods of distribution channels are used by specialty, niche product farmers, and food processors and centralize marketing units within the local agricultural sector. Many farms in Jamaica lack access to efficient distribution channels and as a result cannot supply products at saleable prices or are forced to distribute products using their own labour and vehicles, which is often very inefficient. Understanding how to evaluate and compare distribution channel can greatly improve access to markets, improve sales, lower costs, diversify your customer base, and, most importantly, improve profitability. In reviewing pertinent literature it became obvious to the writer that countries with well developed distribution network are predisposed to higher levels of viability. The Jamaican agricultural sector has been largely existed on arbitrarily design marketing systems which have not advanced the sector. For years farmers and technicians in the ministry have blame market availability for on distribution deficiency.

In addition, there are smaller market outlets such as farm markets that cater to farms and processors producing on a smaller, “sub-commercial” scale. In this regard it is incumbent of the producer to match distribution methods to the size of operation and the types of markets available.

The selection of distribution channels will impinge upon decisions about every other element of the marketing mix. Pricing decisions will be greatly affected by whether the company attempts to mass market through as many wholesale and/or retail outlets as possible, or purposively target a relatively small number of outlets offering its customers high service levels. The amount of promotional effort required of a producer will be a function of how much, or little, of the selling effort is undertaken by the channels of distribution it uses. The primary goals of this research were to: •

sketch appropriate channels of distribution

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Advance the channel that exhibits the most potential for distribution efficiency and market potential

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Assess the channels against those of service delivery channels in the service sector.

Situational analysis of the local sector The sector comprises farms which average approximately 1.8 acres. Most of the small farmers occupying hillside lands are not amenable to mechanization, therefore most of the farms do not benefit from economies of scales. With the average age of the Jamaican farmer over fifty years old coupled with the second highest illiteracy rate in the region the Jamaican farmers are highly challenged in facilitating employment of modern technology. In addition there is a large element of distrust among framer for middlemen. The often times small margins and adverse weather condition has force them to maximize

profits even to their own peril. Despite the above the sector is the largest employer of labour and contributes in excess of five percent (5%) to total GDP. All too often, in Jamaica, middlemen are dismissed as parasites. The argument made is that it is the producer who, by the sweat of his labour, provides the physical commodity and it is he/she who deserves to gain most from marketing transactions in that product. When it is observed that marketing costs are sometimes four or five times the price paid to the farmer, a sense of injustice can arise. However, the value, if any, that the intermediary adds to the product, by virtue of the functions performed, must be taken into account. In other words, those functions have to be carried out by someone and the expense and risk of doing so has to be met. The real question is not whether middlemen are needed but whether the middleman's remuneration is commensurate with the levels of risk carried and the services provided in the form of marketing functions performed. Furthermore, intermediaries can only be justified if they can perform these functions more efficiently and effectively than the other actual or potential market participants. The Jamaica Agricultural Society the main farmer’s organization has marketing and coordination of farmers as its main mandate. With a small field staff, limited marketing capabilities not much of its resources get deployed in marketing. On the other hand the Rural Agricultural Development Authority (RADA) has developed an agricultural marketing extension unit. Information glean from website www.rada.gov.jm revealed; that the unit consist of four regional officers,, a Post harvest Specialist and a Marketing

Manager, is responsible for assisting farmers to locate markets for their fresh produce via all the market sources be-it export or local - fresh food and processing. The major roles are: 1. Assisting farmers with production planning for the market sources. 2. Assisting farmers with identifying and implementing appropriate marketing strategies. 3. Farmers and middlemen / higglers are trained in post harvest handling of produce - use of improved practices. 4. Linkages are made with buyers for farmers and middlemen via the Agro-Export Centre (AMC) office; also with other exporters, wholesalers, and retailers - supermarkets, green groceries, hotels and any other food-purchasing enterprises. Usually, the individual marketing strategy adopted by a farmer can use open-market strategy, closed-market strategy, or a combination of the two. Farmers in a small-scale farming system of the kind found in Jamaica generally prefer using individual marketing strategies, rather than group ones. Exceptions are when crops have a guaranteed price. Group marketing by growers in Jamaica is an attempt to balance the influence of many small-scale farmers on the one hand and that of the exporters, wholesalers and processors on the other. The competitive balance and efficiency of agricultural marketing are continuing issues. Based on the local experience, the cooperative marketing systems for citrus, coconut, coffee, cocoa, potatoes, has shown much success. Most of the Farmers Associations and Commodity boards offer a wide range of marketing options to members. Some of them have aggressive marketing strategies, including vertical integration into processing such as the vegetables growers association,

and direct marketing e.g. fluid milk, banana, coffee sugar cane vegetables ackee and staples, banana,

The global context Basically, most countries in the world have two sets of marketing choices open to agricultural producers. One set permits a maximum amount of freedom of decisionmaking by the individual farmer or producer. Another set involves putting one or more aspects of decision-making on a group basis, thereby providing an alternative outlet or channel for individual farmers. Studies have shown that logistics costs are between 10 percent and 35 percent of companies’ gross revenues. Sixty percent of these logistics costs are for transporting goods. A study by consulting firm PRTM found that companies considered being best practice organizations in moving product to market enjoyed a 45 percent supply chain cost advantage over their median competitors. (Chambers William, et al. 2001) Undoubtedly globalization has created a larger market space. Industries are leveraging effective distribution channels to take advantage of these opportunities. The formation of trade blocks has become a feature of how nations position themselves for preferential trade. As markets open up everywhere the distribution of agricultural outputs becomes a specialized function. Many countries have become aware and have put the necessary structures in place to assist their local sector. Interestingly data has shown that the world demand for staple continues to decline while the demand for fruits, vegetables, legumes, meat fish and milk has shown increases and

will continue to increase with the population becoming more health conscious. Research commissioned by USDA reveals that the demand for agricultural produce has steadily increased over the last 40 years. (Chambers William, et al. 2001) India the world leader in producing vegetables, milk, fruits, meat, poultry and fish is now repositioning its sector through strategic distribution system in order to improve opportunities for local farmers. Also Taiwan has strengthened its sector through the formation of cooperatives and central packaging facilities a trend that has been incorporated in most emerging economies world wide.

The effects of a well developed distribution channel 1.

It stimulates and facilitates the production and marketing of agricultural

commodities. 2.

It directs agricultural output in accordance with clear signals from the market place or market requirements at the local, regional and international levels.

3.

It increases the responsiveness and competitiveness of the agricultural sector

to overseas market requirements. 4. It makes the agricultural sector responsive to the requirements of the local market and the needs of local consumers.

Choosing a Distribution channels There are many variables to consider when choosing a distribution channel. While the local sector is arbitrary for the most part there are some consideration that must be access: • •

Form of your product. E.g. perishable, frozen, bulk, etc. Packaging required

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Gross margins and potential profits.

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How much inventory can you carry?

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If you use multiple channels will there be overlap and confusion?

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How much time can you commit?

The farmer/entrepreneur needs to address these questions before deciding on which type of distribution channel makes the most sense for the business. These decisions will also help form the types of agreements to be developed with the other businesses involved in the distribution of products.

Strategic channel planning: Distribution channels must be compatible with the strategic marketing plan. If, for instance, a skimming strategy has been adopted or the product requires technical sales support, then mass marketing is probably inappropriate. Alternatively, if large volume sales are required in order to achieve particular profit targets, then selective distribution would be inappropriate.

As new products are introduced, existing channels have to be reassessed since they may not be the right channels for the new product. In some cases, a farmer will decide not to grow a new crop because it does not fit in with existing distribution channels and existing strategy. Another consideration is the stage of the product's life cycle. It can happen that as the product proceeds through its life cycle the appropriateness of the distribution channel can change. When developing the strategy, thought should be given to how the needs of the product might differ over its life span. An organization’s distribution strategy is often interconnected with its promotional strategy. As illustrates below, the distribution system can be depicted as a channel through which products and services move from producer to end user. If the agribusiness concerned believes that its product(s) can be meaningfully differentiated from others on the market, then it may elect to direct the greater part of its promotional effort towards end users. This is termed a pull strategy, whereby the objective is to create such a strong preference for the product among end users that the resulting demand pulls the product through the channel of distribution. Where the product is perceived by end users to be a commodity (or one where there is little difference between brands) then the channel strategy of the agribusiness may be to target much of its promotional effort on intermediaries. If intermediaries can be persuaded to stock the product, in preference to those of competitors, then when customers visit a sales outlet and ask for a product by its generic name it is the product of the company which is supplied. This is termed a push

strategy. In practice, the promotional strategies of most agribusinesses will be a combination of pulling and pushing the product through the channel of distribution, but there is likely to be more emphasis on one or the other. The illustration 1.1 provides a graphical representation.

Illustration 1.1

Sketch of market distribution channels Three different methods of distribution are available to and frequently used by the local agricultural sector. The methods are analyzed in terms of availability, efficiency, and cost effectiveness. The distribution systems are:

MIXED DISTRIBUTION CHANNEL

Mixed Distribution Channel Producing Area

Consuming Area

Exporter Producer

Import

Wholesale Dealer direct Sale

Consumer

Retailer

Middle Man

Whole Saler

Exporter

Retailer

Processor

Middle Man

Whole Saler

Producer

Consumer

The mixed distribution channel provides a diagrammatical depiction of how farm produce are management from the producing area to consuming area. What has been made obvious is that most farmers utilize different methods to get his produce sold. In the mixed distribution channel there can be interplay between the exporter, the wholesaler, the middleman and the processor. Invariably their needs are different and therefore require a managed coordination for optimum result. Example-The processor may need the yams rejected by the exporter also, price paid by both will more than likely be different.

HUB AND SPOKE CHANNEL EXPORTER

MIDDLEMAN/BROKER

PROCESSOR

HOTELS

WHOLESALER

RESTURANTS

FARMER

SUPERMARKE TS

CONSUMER

WHOLESALE R

RETAILER

CONSUMER

CONSUMER

HIGGLER

FARMERS MARKET

WHOLESALER

RESTAURAN T

The hub-and-spoke distribution channel (or model /r network) is a system of connections arranged like a chariot wheel, in which all traffic moves along the spokes connected to the hub at the center. The model is commonly used in industry, particularly in transport, telecommunications and freight, as well as in distributed farm produce. A hub and spoke network is a centralized, integrated logistics system designed to keep costs down. Hub and spoke distribution channels move products around, consolidate them, and send them directly to various destinations. The Coronation market in Kingston, Jamaica, for example is a hub with spokes of distribution around the entire island. There are instances of sub -hub and spoke channels as depicted (Fig 1.1) , as outlined, the same farmer will facilitate middleman for access in particular market but on the other hand directly supply others. Drawbacks •

Because this model is centralized, day-to-day operations may be relatively inflexible. Changes at the hub, or even in a single route, can often have unexpected consequences throughout the network. It may also be difficult or impossible to handle occasional periods of high demand between two spokes.

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Route scheduling can be complicated for the network operator. Based on this situation scarce resources must be used carefully to avoid starving the hub.

Careful traffic analysis and precise timing are required to keep the hub operating efficiently. •

Sometimes the hub constitutes a bottleneck in the network. Total cargo capacity of the network is limited by the hub's capacity. Delays at the hub (caused, for example, by bad weather conditions) can result in delays throughout the network.

DIRECT MARKETING (FARMER TO CUSTOMER)

FARMER

CUSTOMER

Direct marketers come in a variety of forms, but their categorization is somewhat are most times similar. The main thing to consider here is each firm’s functions and intentions. Some farmers sell directly to consumers with the express purpose of eliminating retailers that supposedly add cost (e.g., higglers). Others are in the business not so much to save on costs, but rather to reach groups of consumers who are not easily reached by the middleman. Direct marketing is a key feature of rural subsistence farming. The farmer markets the excess himself to friends and neighbours.

Other circumstances when direct marketing may be more useful, for instance when absolute margins are very large (e.g., major crops) or when the customer base is widely dispersed (e.g., bee keepers).

Drawbacks of direct channels Direct distribution channels eliminate the use of middlemen. The advantages of using middlemen as opposed to marketing direct to end-users can be demonstrated very easily. The efficiency of most marketing systems is improved by the presence of effective intermediaries. There are many functions to be carried out in moving the product from producer to customer. Those functions each require funding and, often, specialist knowledge and expertise. Few producers have neither the resources nor the expertise to carry out all of the necessary functions to get a product/service to the ultimate user. A middleman's remuneration should depend upon the number of marketing functions he/she performs and, more specifically, by the efficiency with which such activities are performed. .

Assessing distribution of agricultural products against products in the service sector There is a major difference observed with the distribution of agricultural products when compared to the distribution of service. Interestingly, the local agricultural sector has operated for the most part arbitrarily. The commercial operation, commodity boards and the institutional operation have incorporated some formal marketing system. On the other hand service sector in general is much more organized incorporating the cutting edge

marketing strategies that enhance market positioning. Services are knowledge intensive (people and labor) and typically local (on-site systems design, integration and startup). This type of business is usually subject to intense local competition and cannot easily be scaled up for consistent revenue growth and profit margins. As a result service sectors usually fashioned more complex distribution channels when compared to the product sector. In analyzing the local sector distribution system it is obvious that channels utilized are largely configured by the farmers’ experience, knowledge and financial resources. Largely the channels utilized do not optimize the profitability of the farmers’ operation. Information gleaned from observation has revealed that farmers are most likely to adopt the direct marketing channel. A farmer’s lack of resource and market knowledge can prevent him from maintaining markets especially where constant levels of high quality supplies are required. Farmers, faced with shrinking margins, may often attempt to bypass third-party representatives and distributors by "going direct", or by disintermediating their sales channels.

Recommended Intervention strategies: •

Establish marketing support systems such as information, grades and standards to foster the development of markets for Jamaican agricultural products domestically and internationally;

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Increase Jamaican institutions’ ability to introduce and share new procedures for quality and food safety standardization, crop and price forecasting, and market extension;

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Facilitate the development of warehousing; and

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Upgrade Jamaica’s existing marketing news information and marketing extension systems

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Strengthen producer groups to enable them to have a better bargaining position and more leverage in formulating policy, identifying marketing opportunities and negotiating prices.

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Help producer groups, grass-roots institutions, traders and processors access inventory and capital loans from commercial banks, when needed for promoting marketing activities

Conclusion

Consumers are interested in getting what they want at the lowest possible cost. Farmers are interested in obtaining the highest possible returns from the sale of their products. The various merchants, including exporters, wholesalers, higglers, and retailers engaged in doing the various marketing tasks, are interested in the profitability of their particular business operation. There is no coordination of the various activities. Individual interest therefore supersedes sector interest. Wholesaling is a very important step in the process of distributing agricultural products. In a developing country, farmers and suppliers are numerous but operate on a small scale, as do higglers and retailer. Major food items, whether for domestic consumption or for export, remains mostly in fresh form or have only very basic processing.

References •

Chambers William, et al. 2001. E-commerce in United States agriculture. ERS White Paper, USDA, USA.

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Kohls, Richard L. and W. David Downey. 1972. Marketing of Agricultural Products. 4th Edition. The Macmillan Company, N.Y., USA.

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Liu, Fu-Shan. 1996. Building an Agricultural Marketing System in a Developing Country: The Taiwan Experience. Maw Chang Book Company, Taipei, Taiwan, ROC.

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website: www.JimPinto.com

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www.rada.gov.jm/

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www.pioj.gov.jm