A microblog series on the HubSizer® and MarketSizer® tools from New Venture Advisors.
This week we’re digging into how to use the Rural Grocery HubSizer® tool. This tool was designed for an owner and/or operator of an independent grocery store that has at least some excess storage capacity throughout the week. Independent rural grocery stores face a plethora of challenges, many of which we’ve explored and learned from our own work with rural stores in the Midwest. Not least of which are challenges with shrinking populations which lower overall sales; difficulties competing with super-centers; lack of adequate financing to maintain or improve stores; challenges working with distributors; and high utilities and operating costs.
But these stores also have tremendous assets: loyalty from longtime customers who want to see their community thrive; owners and operators who are local residents and care deeply about the health and economic well being of their town; and infrastructure – large buildings, food processing kitchens, and excess storage to name a few.
New Venture Advisors designed the Rural Grocery HubSizer® to help a store owner determine the potential to diversify their store’s revenue by converting their excess storage into a food hub that connects product from local farmers with wholesale buyers and consumers.
For this post, we’ll take you on an imaginary journey of a store owner, John, who owns Fresh Foods Grocery Store in a rural town in Kansas with a population of 1,200 people. The store has been suffering financially, due to a Walmart that moved in fifteen years ago just 20 miles away and more recently, due to a Dollar General that set up shop just 8 miles away. While Fresh Foods Grocery Store has fresh, local, high quality meats, dairy and produce, it simply has not been able to compete on price with its multinational competitors.
The store does have unused cold and dry storage, and recently, several of the farmers it sources from have been asking if the store could help them sell and distribute their farm products to local school district and hospitals.
John is curious and desperate for a solution to keep his store open. Could distribution of local produce be more than a one-off service? Could he actually run a local food hub out of his store and generate a second line of income to help bolster his brand, reputation, and – more importantly – generate additional profit to keep his store open?
John gives the Rural Grocery HubSizer® tool a shot to understand the potential revenue he could obtain by using his store’s existing assets.
John selects Kansas as his location and begins by entering his storage capacity. To create a food hub in a grocery store, having excess storage capacity to aggregate and store products is essential in determining whether this new business model could be successful:
When looking at his storage usage during the week, John knows that after he clears out and restocks his weekly delivery, he frees up about 25% dry storage and 30% cold storage. He has two tiers of shelving in all dry storage areas and three tiers of shelving in cold storage, each holding two cases or three cases per rack.
John has a relatively tight inbound delivery and stock turnaround schedule. He receives deliveries from his distributor every Tuesday and by Thursday, almost all new product he’s received is on the floor in time for the Friday and weekend rush. He therefore inputs “1” for “How many days per week do you receive major deliveries” and “2” for the number of days it takes him to move inventory out of storage and onto the floor.
The second half of the tool focuses on distribution capabilities of the store:
Many stores have one or more vans that are used for order deliveries, pickups, catering or other services. Fresh Foods Grocery does own one delivery van but it does not get much use any more. This could be an interesting way to leverage this asset. Right now, he only has a qualified driver on staff about 15 hours a week, so he indicates that he has 1 van, available 15 hours per week. He was able to get about 20 cases of produce in the van a few weeks back when he picked up from a farm down the road so he uses that estimate as the van’s capacity.
John isn’t sure what his exact sales breakdown might be across different buyer types. But based on the initial interests from the local farmers who requested help, he puts in 40% to institutions. There are a couple restaurants in town that he knows would love to have more fresh, local produce on the menu so he puts in 15% for restaurants. Hillsboro Foods, a rural grocery in a neighboring town 35 miles away, had indicated they’d be interested in redistribution of some fresh produce from John’s store so he puts down 25% in sales to other grocery store. The remaining sales breakdown goes to product sold in his own store, where he can showcase his unique support of local farmers, fresh produce and his community, to contrast with the big box stores.
Wow! These results are pretty promising.
While the revenue is not great compared to what John already drives in his store, the profitability of an additional $50K a year would actually add a decent amount of extra funds to his bottom line. He is excited about the possibility of leveraging his existing assets – unused dry and cold storage, underutilized staff and a barely used delivery van. Instead of these items simply sitting there, collecting dust, he can put them to work and use them to bump his store’s profitability and viability. John believes he could get access to the 15 or so acres of produce that would be needed.
But, this is the aspect of a potential food hub that has him most worried. How could he secure this production? What pricing could he get? Do he and his team have what it takes to work closely with farmers and make partnerships? And to sell to wholesale accounts?
His next step is to sit down with his team and with a few farmers to see if he could achieve at least 50% of the maximum opportunity given by these results. The good news is, if he can put all the pieces together between farmers, supply and distribution, he has the makings of potentially profitable rural grocery food hub that doesn’t require any major resource or capital investments on his part!
If you’d like a video walkthrough of John’s scenario using the Rural Grocery HubSizer, check out the video below:
In next weeks microblog, we’ll discuss our tool that analyzes a more ‘traditional’ food hub with the Local Produce HubSizer®!