Friday, 13 May 2011

Lessons From the Marketing Chain

It was a Spring ritual that in the end was probably a waste of time, but taught some valuable lessons. The lobster season would start and my colleagues and I at CBC radio and later television would try to make some sense of the shore price for fishermen, and what consumers are paying.  Two things became apparent: the price fishermen got had nothing to with the cost of going fishing, and the rest of the marketing chain would charge whatever they could get away with. There’s nothing like a guilty son or daughter going to buy lobster for Mother’s Day. They’ll pay anything if that’s what’s expected for supper.

The potato racket was even worse. The psychological impact on growers if there was even a perception of a glut on the market was unbelievable. The fear of dragging unsold potatoes to the woods (buried actually) meant farmers were very reluctant to say no to a buyer. What is even more discouraging for growers is the fallout if someone just offers potatoes at a lower price (the sale wouldn’t even have to be made) for that price to become the benchmark everyone had to meet.  (Well-dressed Toronto buyer working in an air conditioned office: ”Well I can get potatoes 25 cents a bag cheaper from (whomever), do you want the sale or not?”  That’s all it takes).

What became apparent to me over the years is that there are two types of players in the marketing chain: producers (including many processors)  who have real costs that have to be covered, and care a lot about what they’re paid, and secondly the “volume and margin” folks (they’re the ones with the nice houses and cars).  The “v and m” bunch look for some difference (and it can be very small) between what they’ve paid for something and what they sell it for (the margin). The challenge then is to drive the volume, that’s where the profit is (search  Walmart in earlier posts). 

The worst of this (from a primary producer’s viewpoint anyway) is that there’s little incentive for the “v and m” folks to get a price from the next person up the marketing chain that will ensure a fair return to farmers and fishermen, as long as they (middlepeople)  can get their margin.  It’s surprising how often you’ll hear consumers say they wouldn’t mind paying another ten or 20 cents for a bag of potatoes if they knew the money would get back to the farmer. The current system, and the many hands farm output goes through before getting to the consumer makes that very difficult.

We can see the impact of this in Ocean Choice’s decision to not open its lobster plant in Souris (at the front end of the lobster marketing chain), BUT it still wants to buy finished product from someone else to market (that’s where  easier money can be made). 

There’s also a much bigger role for brokers in the Maritime lobster business. They give processors (including the various co-ops that are owned by fishermen) access to U.S. and other export markets,  but again they’re iin the margin and volume business, and  much more interested in “the sale” than getting the best price out of the marketplace. There have been some attempts by fishermen (and others)  to take a more direct role in marketing  products, but it’s usually ended badly. The marketing chain likes business just the way it is thank you very much.

The oil business gives us a good comparison. Demand is  considered to be what economists call inelastic (there’s sufficient demand (China, India, etc)  that people will pay almost anything to get it). This gives oil producers and refiners room to make money (and lots of it), and that’s why oil companies like Irving have gotten out of the retail side of the business (where there’s sufficient competition) and margins are small.  It does make you wonder if the Irvings will dust off their plans to build a second refinery in Saint John (considered when there was a world wide recession) if the outlook stays bullish.

Bottom line: there’s not much wisdom to be gained by linking what consumers pay, to what primary producers get (other than in regulated markets like dairy and eggs). The hard reality is that the very people who assume most of the risk of producing or harvesting are the ones with the least clout in the marketing chain. It can get better when primary producers work together, but they're a pretty independent bunch, and brokers and wholesalers will always put up a lot of impediments to maintain the status quo. My mantra, and I think I've mentioned it a few times in this blog, buy from as close to  primary producers as you can, and make sure they get paid fairly. No one else in the marketing chain will.

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