Post on 07-Jun-2015
Using models of consumer buying behaviour, sketch out at
least three distribution channels for the agricultural sector.
How does each of these channels meet distinct customer needs?
And how does this compare with service delivery channels in
the service industry?
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Introduction and Project Background
Agricultural marketing is the performance of all business activities involved in the flow
of goods and services, from the point of initial agricultural production until they are in the
hands of the ultimate consumer (Kohls and Downey 1972).
In the last four decades, there have been several substantial changes in the patterns of
production, consumption, and trade in agriculture. One is the shift in production and
consumption from grains and other starchy staple crops to higher-value agricultural
commodities as meat, milk, eggs, fish, fruits, and vegetables. Another is the growing
importance of agricultural marketing channels, including the expansion of agro-
processing, large-scale retail (e.g. supermarkets), and food services industries (e.g.
restaurants), all of which create a need for various forms of vertical coordination.
The coordination and integration of the sector is enhanced by the presence of strategic
distribution systems and processes. Channels provide the basis for bridging the gap
between the producers and consumers. Basically it enables the right products to the right
consumers at the right price to the right place. The importance of channel decisions has
not always been recognized. For a long time, agricultural marketers only gave thought to
appropriate channels of distribution after the development of the product. Based on
information gleaned, various methods of distribution channels are used by specialty,
niche product farmers, and food processors and centralize marketing units within the
local agricultural sector.
Many farms in Jamaica lack access to efficient distribution channels and as a result
cannot supply products at saleable prices or are forced to distribute products using their
own labour and vehicles, which is often very inefficient.
Understanding how to evaluate and compare distribution channel can greatly improve
access to markets, improve sales, lower costs, diversify your customer base, and, most
importantly, improve profitability.
In reviewing pertinent literature it became obvious to the writer that countries with well
developed distribution network are predisposed to higher levels of viability. The
Jamaican agricultural sector has been largely existed on arbitrarily design marketing
systems which have not advanced the sector. For years farmers and technicians in the
ministry have blame market availability for on distribution deficiency.
In addition, there are smaller market outlets such as farm markets that cater to farms and
processors producing on a smaller, “sub-commercial” scale. In this regard it is incumbent
of the producer to match distribution methods to the size of operation and the types of
markets available.
The selection of distribution channels will impinge upon decisions about every other
element of the marketing mix. Pricing decisions will be greatly affected by whether the
company attempts to mass market through as many wholesale and/or retail outlets as
possible, or purposively target a relatively small number of outlets offering its customers
high service levels. The amount of promotional effort required of a producer will be a
function of how much, or little, of the selling effort is undertaken by the channels of
distribution it uses. The primary goals of this research were to:
sketch appropriate channels of distribution
Advance the channel that exhibits the most potential for distribution
efficiency and market potential
Assess the channels against those of service delivery channels in the
service sector.
Situational analysis of the local sector
The sector comprises farms which average approximately 1.8 acres. Most of the small
farmers occupying hillside lands are not amenable to mechanization, therefore most of
the farms do not benefit from economies of scales. With the average age of the Jamaican
farmer over fifty years old coupled with the second highest illiteracy rate in the region the
Jamaican farmers are highly challenged in facilitating employment of modern
technology. In addition there is a large element of distrust among framer for middlemen.
The often times small margins and adverse weather condition has force them to maximize
profits even to their own peril. Despite the above the sector is the largest employer of
labour and contributes in excess of five percent (5%) to total GDP.
All too often, in Jamaica, middlemen are dismissed as parasites. The argument made is
that it is the producer who, by the sweat of his labour, provides the physical commodity
and it is he/she who deserves to gain most from marketing transactions in that product.
When it is observed that marketing costs are sometimes four or five times the price paid
to the farmer, a sense of injustice can arise. However, the value, if any, that the
intermediary adds to the product, by virtue of the functions performed, must be taken into
account.
In other words, those functions have to be carried out by someone and the expense and
risk of doing so has to be met. The real question is not whether middlemen are needed but
whether the middleman's remuneration is commensurate with the levels of risk carried
and the services provided in the form of marketing functions performed. Furthermore,
intermediaries can only be justified if they can perform these functions more efficiently
and effectively than the other actual or potential market participants.
The Jamaica Agricultural Society the main farmer’s organization has marketing and
coordination of farmers as its main mandate. With a small field staff, limited marketing
capabilities not much of its resources get deployed in marketing. On the other hand the
Rural Agricultural Development Authority (RADA) has developed an agricultural
marketing extension unit. Information glean from website www. rada .gov.jm revealed;
that the unit consist of four regional officers,, a Post harvest Specialist and a Marketing
Manager, is responsible for assisting farmers to locate markets for their fresh produce via
all the market sources be-it export or local - fresh food and processing.
The major roles are:
1. Assisting farmers with production planning for the market sources.
2. Assisting farmers with identifying and implementing appropriate marketing strategies.
3. Farmers and middlemen / higglers are trained in post harvest handling of produce - use
of improved practices.
4. Linkages are made with buyers for farmers and middlemen via the Agro-Export Centre
(AMC) office; also with other exporters, wholesalers, and retailers - supermarkets, green
groceries, hotels and any other food-purchasing enterprises.
Usually, the individual marketing strategy adopted by a farmer can use open-market
strategy, closed-market strategy, or a combination of the two. Farmers in a small-scale
farming system of the kind found in Jamaica generally prefer using individual marketing
strategies, rather than group ones. Exceptions are when crops have a guaranteed price.
Group marketing by growers in Jamaica is an attempt to balance the influence of many
small-scale farmers on the one hand and that of the exporters, wholesalers and processors
on the other. The competitive balance and efficiency of agricultural marketing are
continuing issues. Based on the local experience, the cooperative marketing systems for
citrus, coconut, coffee, cocoa, potatoes, has shown much success.
Most of the Farmers Associations and Commodity boards offer a wide range of
marketing options to members. Some of them have aggressive marketing strategies,
including vertical integration into processing such as the vegetables growers association,
and direct marketing e.g. fluid milk, banana, coffee sugar cane vegetables ackee and
staples, banana,
The global context
Basically, most countries in the world have two sets of marketing choices open to
agricultural producers. One set permits a maximum amount of freedom of decision-
making by the individual farmer or producer. Another set involves putting one or more
aspects of decision-making on a group basis, thereby providing an alternative outlet or
channel for individual farmers. Studies have shown that logistics costs are between 10
percent and 35 percent of companies’ gross revenues. Sixty percent of these logistics
costs are for transporting goods. A study by consulting firm PRTM found that companies
considered being best practice organizations in moving product to market enjoyed a 45
percent supply chain cost advantage over their median competitors. (Chambers William,
et al. 2001)
Undoubtedly globalization has created a larger market space. Industries are leveraging
effective distribution channels to take advantage of these opportunities. The formation of
trade blocks has become a feature of how nations position themselves for preferential
trade. As markets open up everywhere the distribution of agricultural outputs becomes a
specialized function. Many countries have become aware and have put the necessary
structures in place to assist their local sector.
Interestingly data has shown that the world demand for staple continues to decline while
the demand for fruits, vegetables, legumes, meat fish and milk has shown increases and
will continue to increase with the population becoming more health conscious. Research
commissioned by USDA reveals that the demand for agricultural produce has steadily
increased over the last 40 years. (Chambers William, et al. 2001)
India the world leader in producing vegetables, milk, fruits, meat, poultry and fish is now
repositioning its sector through strategic distribution system in order to improve
opportunities for local farmers. Also Taiwan has strengthened its sector through the
formation of cooperatives and central packaging facilities a trend that has been
incorporated in most emerging economies world wide.
The effects of a well developed distribution channel
1. It stimulates and facilitates the production and marketing of agricultural
commodities.
2. It directs agricultural output in accordance with clear signals from the market place
or market requirements at the local, regional and international levels.
3. It increases the responsiveness and competitiveness of the agricultural sector
to overseas market requirements.
4. It makes the agricultural sector responsive to the requirements of the local market
and the needs of local consumers.
Choosing a Distribution channels
There are many variables to consider when choosing a distribution channel. While the
local sector is arbitrary for the most part there are some consideration that must be
access:
Form of your product. E.g. perishable, frozen, bulk, etc.
Packaging required
Gross margins and potential profits.
How much inventory can you carry?
If you use multiple channels will there be overlap and confusion?
How much time can you commit?
The farmer/entrepreneur needs to address these questions before deciding on which type
of distribution channel makes the most sense for the business. These decisions will also
help form the types of agreements to be developed with the other businesses involved in
the distribution of products.
Strategic channel planning:
Distribution channels must be compatible with the strategic marketing plan. If, for
instance, a skimming strategy has been adopted or the product requires technical sales
support, then mass marketing is probably inappropriate. Alternatively, if large volume
sales are required in order to achieve particular profit targets, then selective distribution
would be inappropriate.
As new products are introduced, existing channels have to be reassessed since they may
not be the right channels for the new product. In some cases, a farmer will decide not to
grow a new crop because it does not fit in with existing distribution channels and existing
strategy.
Another consideration is the stage of the product's life cycle. It can happen that as the
product proceeds through its life cycle the appropriateness of the distribution channel can
change. When developing the strategy, thought should be given to how the needs of the
product might differ over its life span.
An organization’s distribution strategy is often interconnected with its promotional
strategy. As illustrates below, the distribution system can be depicted as a channel
through which products and services move from producer to end user. If the agribusiness
concerned believes that its product(s) can be meaningfully differentiated from others on
the market, then it may elect to direct the greater part of its promotional effort towards
end users. This is termed a pull strategy, whereby the objective is to create such a strong
preference for the product among end users that the resulting demand pulls the product
through the channel of distribution. Where the product is perceived by end users to be a
commodity (or one where there is little difference between brands) then the channel
strategy of the agribusiness may be to target much of its promotional effort on
intermediaries. If intermediaries can be persuaded to stock the product, in preference to
those of competitors, then when customers visit a sales outlet and ask for a product by its
generic name it is the product of the company which is supplied. This is termed a push
strategy. In practice, the promotional strategies of most agribusinesses will be a
combination of pulling and pushing the product through the channel of distribution, but
there is likely to be more emphasis on one or the other. The illustration 1.1 provides a
graphical representation.
Illustration 1.1
Sketch of market distribution channels
Three different methods of distribution are available to and frequently used by the local
agricultural sector. The methods are analyzed in terms of availability, efficiency, and cost
effectiveness. The distribution systems are:
MIXED DISTRIBUTION CHANNEL
The mixed distribution channel provides a diagrammatical depiction of how farm
produce are management from the producing area to consuming area. What has been
made obvious is that most farmers utilize different methods to get his produce sold. In the
mixed distribution channel there can be interplay between the exporter, the wholesaler,
the middleman and the processor. Invariably their needs are different and therefore
require a managed coordination for optimum result. Example-The processor may need
the yams rejected by the exporter also, price paid by both will more than likely be
different.
HUB AND SPOKE CHANNEL
FARMER
MIDDLEMAN/BROKER WHOLESALER
RESTURANTS
CONSUMER
HOTELS
SUPERMARKETS
PROCESSOR
HIGGLER
FARMERS MARKET WHOLESALERCONSUMER
WHOLESALER
RESTAURANT
RETAILER
CONSUMER
EXPORTER
The hub-and-spoke distribution channel (or model /r network) is a system of connections
arranged like a chariot wheel, in which all traffic moves along the spokes connected to
the hub at the center. The model is commonly used in industry, particularly in transport,
telecommunications and freight, as well as in distributed farm produce.
A hub and spoke network is a centralized, integrated logistics system designed to keep
costs down. Hub and spoke distribution channels move products around, consolidate
them, and send them directly to various destinations.
The Coronation market in Kingston, Jamaica, for example is a hub with spokes of
distribution around the entire island. There are instances of sub -hub and spoke channels
as depicted (Fig 1.1) , as outlined, the same farmer will facilitate middleman for access
in particular market but on the other hand directly supply others.
Drawbacks
Because this model is centralized, day-to-day operations may be relatively
inflexible. Changes at the hub, or even in a single route, can often have
unexpected consequences throughout the network. It may also be difficult or
impossible to handle occasional periods of high demand between two spokes.
Route scheduling can be complicated for the network operator. Based on this
situation scarce resources must be used carefully to avoid starving the hub.
Careful traffic analysis and precise timing are required to keep the hub operating
efficiently.
Sometimes the hub constitutes a bottleneck in the network. Total cargo capacity
of the network is limited by the hub's capacity. Delays at the hub (caused, for
example, by bad weather conditions) can result in delays throughout the network.
DIRECT MARKETING (FARMER TO CUSTOMER)
Direct marketers come in a variety of forms, but their categorization is somewhat are
most times similar. The main thing to consider here is each firm’s functions and
intentions. Some farmers sell directly to consumers with the express purpose of
eliminating retailers that supposedly add cost (e.g., higglers). Others are in the business
not so much to save on costs, but rather to reach groups of consumers who are not easily
reached by the middleman. Direct marketing is a key feature of rural subsistence farming.
The farmer markets the excess himself to friends and neighbours.
FARMER CUSTOMER
Other circumstances when direct marketing may be more useful, for instance when
absolute margins are very large (e.g., major crops) or when the customer base is widely
dispersed (e.g., bee keepers).
Drawbacks of direct channels
Direct distribution channels eliminate the use of middlemen. The advantages of using
middlemen as opposed to marketing direct to end-users can be demonstrated very easily.
The efficiency of most marketing systems is improved by the presence of effective
intermediaries.
There are many functions to be carried out in moving the product from producer to
customer. Those functions each require funding and, often, specialist knowledge and
expertise. Few producers have neither the resources nor the expertise to carry out all of
the necessary functions to get a product/service to the ultimate user. A middleman's
remuneration should depend upon the number of marketing functions he/she performs
and, more specifically, by the efficiency with which such activities are performed.
.
Assessing distribution of agricultural products against
products in the service sector
There is a major difference observed with the distribution of agricultural products when
compared to the distribution of service. Interestingly, the local agricultural sector has
operated for the most part arbitrarily. The commercial operation, commodity boards and
the institutional operation have incorporated some formal marketing system. On the other
hand service sector in general is much more organized incorporating the cutting edge
marketing strategies that enhance market positioning. Services are knowledge intensive
(people and labor) and typically local (on-site systems design, integration and startup).
This type of business is usually subject to intense local competition and cannot easily be
scaled up for consistent revenue growth and profit margins. As a result service sectors
usually fashioned more complex distribution channels when compared to the product
sector.
In analyzing the local sector distribution system it is obvious that channels utilized are
largely configured by the farmers’ experience, knowledge and financial resources.
Largely the channels utilized do not optimize the profitability of the farmers’ operation.
Information gleaned from observation has revealed that farmers are most likely to adopt
the direct marketing channel. A farmer’s lack of resource and market knowledge can
prevent him from maintaining markets especially where constant levels of high quality
supplies are required. Farmers, faced with shrinking margins, may often attempt to
bypass third-party representatives and distributors by "going direct", or by
disintermediating their sales channels.
Recommended Intervention strategies:
Establish marketing support systems such as information, grades and standards to
foster the development of markets for Jamaican agricultural products domestically
and internationally;
Increase Jamaican institutions’ ability to introduce and share new procedures for
quality and food safety standardization, crop and price forecasting, and market
extension;
Facilitate the development of warehousing; and
Upgrade Jamaica’s existing marketing news information and marketing extension
systems
Strengthen producer groups to enable them to have a better bargaining position
and more leverage in formulating policy, identifying marketing opportunities and
negotiating prices.
Help producer groups, grass-roots institutions, traders and processors access
inventory and capital loans from commercial banks, when needed for promoting
marketing activities
Conclusion
Consumers are interested in getting what they want at the lowest possible cost. Farmers
are interested in obtaining the highest possible returns from the sale of their products. The
various merchants, including exporters, wholesalers, higglers, and retailers engaged in
doing the various marketing tasks, are interested in the profitability of their particular
business operation. There is no coordination of the various activities. Individual interest
therefore supersedes sector interest.
Wholesaling is a very important step in the process of distributing agricultural products.
In a developing country, farmers and suppliers are numerous but operate on a small scale,
as do higglers and retailer. Major food items, whether for domestic consumption or for
export, remains mostly in fresh form or have only very basic processing.
References
Chambers William, et al. 2001. E-commerce in United States agriculture. ERS
White Paper, USDA, USA.
Kohls, Richard L. and W. David Downey. 1972. Marketing of Agricultural
Products. 4th Edition. The Macmillan Company, N.Y., USA.
Liu, Fu-Shan. 1996. Building an Agricultural Marketing System in a Developing
Country: The Taiwan Experience. Maw Chang Book Company, Taipei, Taiwan,
ROC.
website: www.JimPinto.com
www.rada.gov.jm/
www.pioj.gov.jm