Assessing the profitability of scaling up for retail access

Lessons from local salad mix in Southeast Michigan

Abstract

Changes to the supermarket supply chain in recent decades have “squeezed out” local and small farmers in exchange for more consolidated and global suppliers. As a result, these small-scale farmers have turned to more direct-to-consumer markets, which capture a higher price point but also bear higher marketing costs. Previous research indicates potential saturation and lack of profita­bility in this market type. Researchers have explored strategies for “scaling up” local farmers into intermediary supply chains, such as grocery retail, and have tested the profitability of hybrid marketing strategies with positive results. However, there are very few studies that utilize production costs to test market feasibility, and even fewer that include retailer willingness-to-pay estimates. To assess strategies from the perspectives of both producers and buyers, this study uses salad mix in Southeast Michigan as a pilot case. Farmer-generated production costs incurred for strategies and production types were estimated in focus groups, and retailer willingness-to-pay estimates were obtained in interviews. The analysis suggests that a combination of more efficient harvest technology and central processing would have the greatest impact on increasing profitability, but the dramatic effect that central processing has on output price makes it the most feasible strategy for small-scale farmers. In addition, the minimal costs of organic certification for small farmers are likely to be justified by the price premium that grocery retailers are willing to pay. Hydroponic production may be challenging to break even at a smaller scale but could potentially meet retailers’ price prefer­ences at larger scales. Pairing production cost estimates with buyer willingness-to-pay estimates may generate more comprehensive assessments of the relative profitability of potential scaling-up strategies. This method could be applied to other crops, regions, and produce buyers by cooperative extension, nonprofit, or local government person­nel working with small farmers on their market development plans.