Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

Major Alternate Marketing Channels in the U.S. Food System1 Allen F. Wysocki2

Introduction Agricultural Production

In this article I will focus on the major marketing Agricultural production consists of all firms channels that make-up the U.S. food system from involved in the growing/raising of food. Products input supplier to the consumer in our agri-food created at this stage are often referred to as system. This article will only highlight the various commodities. Commodities by definition are channels, but upcoming articles will explore the mass-produced unspecialized products (Merriam th channels in greater detail. Webster's Collegiate Dictionary, 10 edition, 1996). That is, products from one producer tend to be similar Marketing Channels Illustrated (undifferentiated) to products from another.

Major marketing channels for the U.S. food There were approximately 1,911,859 farms in system are illustrated in Figure 1. The left-hand the U.S. as of the 1997 Census of Agriculture column of Figure 1 indicates the various stages of the conducted by the USDA. This number has fallen food system, beginning with input supplies and from 2,087,759 farms in 1987. The U.S. was once an ending with consumption. The lines and arrows agrarian society. However, farm population has represent flows from one channel to another. Each of fallen dramatically over the last 100 years, and these stages is discussed and examples from corn farmers account for less than two percent of the U.S. marketing channels are cited. population today.

Input Supplies Firms involved in fruit, vegetable, grain, livestock, and aquaculture are all part of the If one uses the analogy of seed to table, input agricultural production sector. For example, Lynn supplies would include companies that produce and Jensen, current president of the National Corn sell seed. Firms belonging to the input supply Growers Association, farms 2,500 acres of corn, category provide products and services used as inputs soybeans, edibles, and alfalfa in Lake Preston, South into agricultural production. Dakota.

1. This is EDIS document RM 002, a publication of the Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida, Gainesville, FL. Published March 2000. Please visit the EDIS website at http://edis.ifas.ufl.edu. 2. Allen F. Wysocki, assistant professor, Department of Food and Resource Economics, University of Florida, Gainesville, FL. Extension web page: http://webct.nerdc.ufl.edu:8900/public/WysockiExtension/index.html The use of trade names in this publication is solely for the purpose of providing specific information. UF/IFAS does not guarantee or warranty the products named, and references to them in this publication does not signify our approval to the exclusion of other products of suitable composition.

The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide research, educational information and other services only to individuals and institutions that function without regard to race, color, sex, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Service office. Florida Cooperative Extension Service/Institute of Food and Agricultural Sciences/University of Florida/Christine Taylor Waddill, Dean. Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

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Figure 1. Exhibit 1

Commodity Assembly other firms in the marketing channel. For example, a grain elevator company acts as local assembler when Commodity assemblers are divided into two it buys corn from an area farmer and then sells this groups: local assemblers and terminal assemblers. corn to a processor. Generally speaking, local Local assemblers are firms that collect agricultural assemblers do not usually change the physical form products from producers and then redistribute them to of the agricultural product although they often add Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

Major Alternate Marketing Channels in the U.S. Food System 3 value to products by performing sorting and grading Wholesaling functions. The primary functions performed at this stage Terminal assemblers are firms that may purchase include the assembly of products produced by products directly from producers or from local producers, initial processors, and food manufacturers assemblers. The distinguishing feature of these firms and the distribution of these products to retailers. One is that they are usually the last firm to handle difference between local assemblers and wholesalers products in the physical form found at the producer is the nature of the products. Although wholesalers level. Terminal assemblers, like local assemblers, perform an assembly function, the products they may add value to products by performing sorting and distribute tend to be transformed or have had value grading functions. Generally speaking, terminal added to them in some way or another. assemblers are larger and tend to handle larger volumes of products than local assemblers. Terminal In the marketing channel diagram, the assemblers are often located at terminal markets that wholesaling function is separated into four distinct export agricultural commodities. An example of a components: integrated grocery wholesalers, terminal assembler would be Cargill (when it non-integrated grocery wholesalers, integrated purchases corn from local elevators and/or large corn foodservice wholesalers, and non-integrated producers for sale to processors or for export to foodservice wholesalers. another country). Integrated Grocery Wholesalers Initial Processing Integrated grocery wholesalers serve the grocery The next stage in the U.S. marketing channel (supermarkets, warehouse clubs, convenience stores, system is initial processing. It is at this stage that the etc.) industry as opposed to the foodservice physical form of the product is changed. The U.S. (restaurants, cafeterias, prisons, etc.) industry. Census Bureau combines the number of all firms Integrated grocery wholesalers own retail (initial and further processing) involved in the grocery store chains that self-distribute. That is, these manufacturing of food and kindred products. There grocery retailers are the distributor who delivers the were 20,878 firms estimated to be involved in these majority of the products they offer consumers. The two stages of processing in 1997. For example, top 25 self-distributing retailers accounted for over 43 Archer Daniels Midland performs initial processing percent of food store sales in 1997 (Food Institute when it transforms bulk field corn into high fructose Report). corn syrup (HFCS). Publix is an example of an integrated grocery Further Manufacturing wholesaler. For example, a corn tortilla manufacturer The raw farm commodity or initially processed such as Ortega delivers cases of corn flour tortillas to product is changed once again or has additional value one of Publix's four warehouses. The tortillas are added at the further manufacturing stage. The end then distributed to over 600 Publix stores across result is usually the product form purchased by Florida, Alabama, Georgia, and South Carolina. consumers. Non-Integrated Grocery Wholesalers Food manufacturers are the most recognizable Non-integrated grocery wholesalers are type of firms at this stage. Kraft, General Foods, and distributors who, in general, do not own the retail Kellogg's have been household names for years. Coca grocery stores they service. Although it is common Cola Company performs further manufacturing when for non-integrated grocery wholesalers to own a small it purchases HFCS from ADM and converts the percentage of the retail grocery stores to which they HFCS into Coca Cola¨, the number one branded deliver, their focus is on serving independent grocery product in the world. stores. In 1997, there were approximately 97 non-integrated grocery wholesale/retailers in the U.S. Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

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This number is down significantly from 366 in 1985 corn flour tortillas from a company like Ortega and (National Grocers Association). re-sells and delivers them to local Mexican food restaurants. Super Valu is an example of a non-integrated grocery wholesaler. A corn tortilla manufacturer such Retailing as Ortega delivers cases of corn flour tortillas to one of Super Valu's 30 full-line distribution centers. The Retailing is the stage in the U.S. food system tortillas are then distributed to 6,100 independent where firms come into direct contact with the final grocery stores across the U.S. from Super Valu consumer. Firms at this stage add value by assembling warehouses. and offering an assortment of products from producers, initial processors, food manufacturers, and Integrated Foodservice Wholesalers wholesalers. Cases of products are broken down and sold by the unit to customers. Savvy retailers Integrated and non-integrated foodservice increasingly bundle food products into meal solutions wholesaler sales were expected to reach a combined to satisfy time-starved customers. total of $371.6 billion in 1999, according to Technomics, Incorporated, a Chicago-based research Total retail food sales were estimated to be and consulting firm. $573.0 billion in 1997 (Food Institute Report). In this newsletter the retailing function has been separated Integrated foodservice wholesalers own into three distinct components: retail food stores, self-distributing retail foodservice operations. That is, foodservice outlets, and specialty retailers. these foodservice retailers are the distributors who deliver the majority of the products they offer Retail Food Stores consumers. According to the Food Institute Report, there Shoney's is an example of an integrated were approximately 29,000 retail food stores in the foodservice wholesaler. A corn tortilla manufacturer U.S. in 1997. Retail food store formats include, but such as Ortega delivers cases of corn flour tortillas to are not limited to, super centers, wholesale clubs, one of Shoney's three warehouses. From these traditional grocery stores, and limited assortment warehouses, the tortillas are delivered to each of the stores. In 1997, there were approximately 46,000 1,200 Shoney's restaurants located in 28 states across convenience stores that sold grocery items alone and the Midwest and Southeast United States. an additional 36,750 convenience stores that sold gas as well as grocery items. Non-Integrated Foodservice Wholesalers Returning to the tortilla example, a grocery store Non-integrated foodservice wholesalers are such as Hitchcock's Foodway will order Ortega corn distributors who do not own the retail foodservice flour tortillas from the warehouse (Super Valu in this establishments they serve. Their focus is on serving case) to place on its shelves for consumers to independent and chain foodservice establishments purchase. such as fast food restaurants, family restaurants, schools, corporate feeding programs, etc. In 1998, Foodservice Outlets there were more than 5,000 foodservice distributors in the U.S. (Food Marketing: An International The term foodservice outlet is a catch-all phrase Perspective). The largest 50 firms were responsible used to describe firms that prepare food and meals for for approximately 30 percent of all sales in 1998. consumption away from home. Examples of firms operating in this segment include, but are not limited The largest non-integrated foodservice to, restaurants of all types, cafeterias, prisons, wholesaler in the U.S. is Sysco Food Services, with hospitals, nursing homes, universities, camps, resorts, 1999 sales exceeding $17 billion (1999 Sysco Annual hotels, and food vending companies. Report). Sysco has over 78 distribution warehouses located across the U.S. and Canada. Sysco purchases Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

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There were over 385,000 restaurants in the U.S. Importing and Exporting in 1997 (Technomics, Inc.). By 1999, Americans spent an average of 46 percent of their food dollar The import and export boxes in Figure 1 are (Food Industry Review 1999) on food away from designed to show that both imports and exports are home. For example, your favorite Mexican-style part of the U.S. food marketing channels. For restaurant could very well be serving Ortega corn example, the U.S. exported approximately 193,735 flour tortillas shipped to them by their integrated or million metric tons and imported approximately non-integrated foodservice wholesaler. 5,290 million metric tons of sweet corn in 1997 (USDA). Specialty Retailers Conclusion Specialty retailer is a name assigned to those food retailers who tend to specialize in a limited This article gave a brief overview of the various assortment of products and offerings to their marketing channels in the U.S. food system. customers. The most common examples include the Although each marketing channel was presented as a local butcher shop and the local produce/fruit stand. distinct and separate entity, vertical coordination If the specialty retailer is known for its Mexican takes place at various levels and in varying degrees. cuisine, it is possible that customers could pick up For example, Publix purchases raw milk from a their favorite Ortega corn flour tortillas along with Florida dairy cooperative. At the Publix dairy plant, fresh guacamole. this raw milk is transformed into various dairy products, including fluid milk, cottage cheese, Consumption yogurt, and ice cream. These products are then shipped to one of 600 Publix grocery stores located There were approximately 269 million across the Southeast. In the case of dairy products, Americans in 1997. Therefore, in 1997, each Publix operates at the local and terminal assembler, American consumed, on average, 81 pounds more manufacturing, wholesaling, and retailing stages of commercially-grown vegetables; 65 pounds more the food system. grain products; 57 pounds more fruit; 32 pounds more caloric sweeteners; 13 pounds more total red meat, Your comments and suggestions are always poultry, and fish (boneless, trimmed equivalent); 17 welcome and you may email me directly at pounds more cheese; 13 pounds more added fats and [email protected] or respond via my oils; 3 gallons more beer; 70 fewer eggs; 10 gallons extension web page at less coffee; and seven gallons less milk than in http://webct.nerdc.ufl.edu:8900/public/ 1970. WysockiExtension/index.html. As the need arises, I will post and respond to reader comments and Retail food prices, as measured by the Consumer questions regarding wholesaling and retailing. Price Index (CPI), increased 2.6 percent in 1997. Food price inflation in 1997 was higher than the References overall increase in the CPI for all goods and services (2.3 percent) for the third consecutive year. 1997 Census of Agriculture. U.S. Department of Americans spent $715 billion for food in 1997 and Agriculture. http://www.nass.usda.gov/census97. another $95 billion for alcoholic beverages. Away-from-home meals and snacks captured 45 1997 Economic Census. U.S. Census Bureau, percent of the U.S. food dollar in 1997, up from 39 Department of Commerce. p. 1-595. percent in 1980 and 34 percent in 1970. The http://www.census.gov/main. percentage of disposable personal income spent on The Food Institute Report. Various issues. A food declined from 13.8 percent in 1970 to 10.7 newspaper published 51 weeks each year by the percent in 1997 (Food Consumption, Prices, and American Institute of Food Distribution, Inc., Expenditures, 1970-1997). An upcoming newsletter Fairlawn, NJ. http://www.foodinstitute.com. will be devoted exclusively to consumers. Archival copy: for current recommendations see http://edis.ifas.ufl.edu or your local extension office.

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Putnam, Judith Jones and Jane E. Allshouse. Food Consumption, Prices, and Expenditures, 1970-97. Food and Rural Economics Division, Economic Research Service, U.S. Department of Agriculture. Statistical Bulletin No. 965

The Food Institute Review. Various issues. A newspaper published 51 weeks each year by the American Institute of Food Distribution, Inc. Fairlawn, NJ. http://www.foodinstitute.com.

Schaffner, David J., William R. Schroder, and Mary D. Earle. Food Marketing: An International Perspective. Boston, MA: McGraw-Hill. 1998.

Grocery Distribution, a trade magazine serving the grocery industry.

National Corn Growers Association Website http://ncga.com.

National Grocers Association Website http://nationalgrocers.org.

Shoneys Corporate Website http://www.shoneys.com.

SuperValus Corporate Website http://www.supervalu.com.

Technomics, Inc. A consulting and research firm serving the grocery and foodservice industry.

USDA Economic Research Service Website. http://www.ers.udsa.gov.