Creating A Healthier Organic Food Distribution Network

by

ERP Analyst,

Most of us would eat better if we could afford to. I know I would. Even though I’m a proponent of organic farms, grocers and food, I tend to lose my organic appetite when I see the hefty price tag that comes along with it. It may just be a few cents here or there, but multiplied over an entire bill – and then multiplied over weeks and months – the difference adds up.

So what makes organic food more expensive? A major factor is scale. Because most organic farms don’t operate at economies of scale, the amount of man hours required for harvesting and post-harvesting activities is much greater than conventional methods. For the same reason, the cost of marketing and distributing organic food is higher as well.

The national options really boil down to two distributors: Tree of Life and United Natural Foods. With them being the only major distributors, products often get discontinued and then we have difficulty stocking the item.” – Dan Gilotte, Wheatsville Co-op

In addition to scale, organic food also suffers from an inefficient distribution network that's still largely based on word-of-mouth business. To manage the organic distribution network, distributors will need to adopt technology that automatically informs grocers of available inventory and pricing. At the same time, grocers will need to invest in technology that allows them to find the right organic distributor at the best price.

Further pushing the price up is the fact that the demand for organic food far outweighs the available supply. All things combined – scale, distribution, supply, and cost – the consequences are creating unequal access to quality food for many Americans.

The Health-Wealth Divide: Consumption of Healthy Food

The high price of organic food is a strange irony. Today, we’re paying a premium to get food the way it used to be grown and harvested in our grandparents’ generation, before agribusiness and genetic modification came to utterly dominate our food supply. The problem of unequal food access has resulted in a phenomenon known as food deserts, or regions where there’s little to no access to healthy food markets. So if it’s still difficult for Americans to access conventionally produced food, then it’s no wonder that the challenge to distribute healthy organic food is great.

The federal government’s 2010 update to the food pyramid may make it even more difficult to get the proper nutritional value – calling for Americans to eat more potassium, dietary fiber, vitamin D and calcium. According to reporter Donna Gordon Blankinship’s recent article, these changes are expected to add several hundred dollars to the average American’s grocery bill. In her article, researchers estimate that roughly 15 percent of Americans, or 49 million people, make food decisions based on cost alone. Thus a healthy, well-balanced diet is pushed further out of reach for many. As the income gap between rich and poor continues to widen, this problem is likely to be exacerbated.

There are, however, some encouraging trends in the organics food market. A survey by the Organic Trade Association found that sales revenue from organic food in the U.S. had exploded to $25 billion by 2009 – 25 times that of 1990. This kind of growth is impressive, and it’s certainly progress toward reaching scale in the industry, but it’s all relative. For perspective, Americans spend roughly $1 trillion on food, indicating that industrial and processed food still own the lion’s share of the market.

So what can be done in the interim while organic food scales up production? In taking a look at how a few successful health food grocers handle their distribution, we can see how distribution chains can be made more efficient to help reduce food prices.

The Organics Distribution Market: The Austin Example

Austin is known for being home to many things – a hip culture, blues guitar, South by Southwest music festival and a hotbed of technology. It’s also home to a health-conscious group of shoppers who love eating organic foodstuffs and “going local.” It’s no surprise then that Austin is the birthplace of Whole Foods Market, one of the nation’s largest and most successful organic health food grocers.

The abundance of health-savvy shoppers has fueled a mini boom of organic markets in Austin as well. I caught up with Dan Gillotte, the general manager of Wheatsville Co-op, a successful local health food store, to discuss how they manage distribution operations.

According to Gillotte, managing packaged items isn’t that tricky. These organic products tend to have a lengthy shelf life and are fairly easy to buy in bulk and keep in stock. It’s the produce that’s the real thorn in a store owner’s side. Organic produce is what the industry refers to as “loss leaders,” or products that draw shoppers into a store but net small profits.

Gillotte explained that his store often has to turn to local producers in order to secure the right produce. In Texas, this is especially difficult given the fact that summer days usually hover around 100 degrees and nothing can grow. Other regions suffer similar problems of seasonality. Beyond the national distributors, Gillotte explained, it turns into a relationship-based business. Even in 2011, most organic food producers are found by word-of-mouth.

A better and more efficient use of technology is the single most important thing organic food distributors need today. They are stuck using comparatively archaic methods of communicating their available supply with most transactions conducted over the phone or by email.” – Stephen Jennings, NaturalPro Ltd. Consulting

However, these issues aren’t isolated to smaller storefronts. Stephen Jennings, Director of NaturalPro Ltd. Consulting, explained that even large grocers like Whole Foods primarily source through word-of-mouth transactions. And it’s astounding that a company like Whole Foods – with sales exploding from from $1.9 billion to $8.5 billion between 2001 to 2010 – still relies on such a basic means of sourcing their organic food supply.

Much like mom-and-pop operations, Whole Foods tends to streamline their sourcing operations with regional buying managers that are tapped into the community. The problem isn’t that Whole Foods lacks the technology to better manage operations, it’s that their organic suppliers are caught in a technology gap.

Currently, most organic distributors (except the national ones) don’t have methods for automatically indicating their supply levels, pricing or coordinating pick-ups and drop-offs. Without some level of automation in their processes, organic food distributors are caught in an inefficient game of cat and mouse where each has to guess the appropriate time to broker a deal.

This – along with the general lack of suppliers – can lead to fluctuations in the organic food market and result in higher prices for the consumer. However, these supply fluctuations and high prices can be tempered by taking a more strategic and technological approach to organic distribution.

Creating A More Efficient Distribution Network

The success and expansion of healthy food chains like Whole Foods and Wheatsville Co-op is critical to deflating the price and increasing the accessibility of healthy, organic foods at the consumer and wholesale level. Smart use of technology will play a pivotal role in making this happen. Here are a few more ways that the organics market can improve distribution methods.

  1. Close the Communication Gap – Most distributors that specialize in organic distribution don’t have the technology infrastructure to create smart, efficient distribution routes. Distribution software can help select optimal delivery routes, manage the status and location of produce in real-time and ensure on-time delivery.
  2. Better Manage Supplier Relationships – Finding the right supplier at the right price is critical regardless of the kind of business you run. Using procurement software can make the task of finding an organic distributor simpler. Meanwhile, it makes it easier for organic distributors to indicate supply levels and desired pricing schemes. Grocers can also use the software to compare prices and delivery times for distributors in order to choose the cheapest, most efficient carrier.
  3. Aggregate Purchasing Activities – Collectives often buy in bulk because it makes purchasing otherwise expensive items affordable. Organic grocers should band together to purchase in bulk for multi-location drops similar to the way collectives manage purchasing. One of the reasons that organics remain expensive is because each storefront purchases only for themselves. If organic stores banded together, they could realize much greater wholesale cost savings.

These are just a few of my ideas on how organic distribution chains can grow effectively while becoming more pervasive, affordable and accessible. If you have an idea on how to extend this value chain, leave me a note in the comments section below.

 
  • http://twitter.com/IronCladBen Benjamin Benulis

    It seems like an odd juxtaposition that organic demand outpaces supply yet co-ops like Wheatsville make little money on them.  I live in Austin and shop at Wheatsville semi-regularly, and yes their prices are really high on even conventionally grown produce.

    I think software could really help the distributors out.  Lately I have been changing my diet to be 80%+ produce.  This has caused me to seek out distributors so that I can buy in bulk for myself.  Unfortunately, it’s like trying to do business with a dinosaur.  Pickup times are usually only early morning and you always have to call and reach a human being just to get a price quote.  Organic items are rarely in stock and when you work a normal 8-5 job you can’t show up at 10am on a Thursday just because that’s when they’ll get their organic blueberries.
    If someone could develop a simple out-of-the-box ERP for these guys, I bet it would be pretty simple to manage inventory.  Heck, I’ve seen semiconductor companies with wildly complex supply chains do it on excel spreadsheets alone.  How hard could it be?  Wish I had the programming knowledge to take a crack at something like that.

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