From the Field: New Study Helps Food Hubs Thrive

By Karen Macdonald - Wednesday, July 15, 2015

Food hubs are a growing movement across the country and are focused on making healthy, local food accessible to a broader audience while ensuring fair returns to farmers. A break from the traditional approach to food marketing and distribution, food hubs have been in need of more data to give growers insights about how best to organize, price and operate to achieve their social objective and earn enough revenue to succeed.

To help meet the need for data and insights, Farm Credit joined with Wallace Center at Winrock International, a non-profit that hosts the National Good Food Network (NGFN), to develop COUNTING VALUES: Food Hub Financial Benchmarking Study. This new study was made possible through a grant from Farm Credit’s national contributions program and draws on financial and operational data from 48 regional food hubs in the nation. Wallace Center, a learning community of individuals and organizations pursuing market-based approaches to a more sustainable and equitable food and farm sector, says there are currently more than 300 regional food hubs in the U.S. The new study’s findings provide an in-depth look at the growth—and growing pains—of these wholesale intermediaries. Among the top insights are:

• Almost half of all food hubs are less than five years old. During this time, many experienced double digit annual growth rates.
• The highest performing 25 percent posted a 4 percent profit compared to the average of -2 percent. Within this relatively narrow spectrum, the most profitable food hubs were larger, older, and for-profit operations. Those with sales greater than $1.5 million averaged profits of 2 percent while food hubs between five and 10 years in operation averaged 1 percent profit. On average, for-profit food hubs earned a 1 percent profit compared to not-for-profit food hubs, which posted -7 percent before consideration of grant income or contributions.
• The top 25 percent of hubs spent 39 percent more on labor (cost per worker equivalent). Those workers outperformed their peers by 56 percent (sales per worker equivalent). These factors can make a big difference in a thin margin business. The gross margin of the typical food hub in the study was 14.5 percent. That means only 14.5 cents of every sales dollar remained after selling the product to cover overhead or provide profit. Balancing profit margins with goals for an equitable food system is an ongoing challenge for some food hubs, which can be addressed in part with more efficient operations.

“This comparative data is intended for food hub management,” says Counting Values’ lead author Erin Pirro, a farm business consultant with Farm Credit East. “It can also be useful to farmers and food producers as well as lenders, investors, and grant makers. All need to understand where the risks are for each stage in the value chain and for the sector as a whole.”

The financial benchmarks are designed to help food hub operators generate sufficient revenue to achieve economic sustainability. Tina Prevatte, Co-CEO of participating hub Firsthand Foods, says, “This study provides useful metrics that will allow us to more effectively track our progress in a brand new industry. We’re building something that is different from the traditional food industry. Slim margins and operating near breakeven are actually signs of success when your intention is to make good food accessible to all while also paying farmers fairly and equitably.”

The previous lack of reliable data has also impeded local food sector investment, says Kate Danaher, lending manager with RSF Social Finance. This three-decade-old, San Francisco-based financial services organization makes investments, loans and grants to non-profit and for-profit enterprises—including more than $5 million in loans to 11 hubs.

“Over time RSF expects this study to act like a compass – a true north of sorts— revealing the operational trends that will validate an organization’s business model and path to self-sufficiency,” Danaher says. “For funders, these trends will inform how we choose to support and capitalize this movement.”

For more details, download the full report.