Buyer Perspectives on Selling Wholesale

A Wholesale Buyer Discusses Herbal Product Sourcing: Practical Considerations for Smaller-Scale Growers Selling into a Global Marketplace

Perspectives from David Doty, Botanical Development Manager with Mountain Rose Herbs

As with many other agricultural products, the herbal supply chain is quite complex. Multiple types of raw material suppliers and buyers participate in an array of processing and distribution channels from field to end user. Global economics play a large role in establishing prices for raw materials as do economies of scale. By understanding some of the complexities of this supply chain, and the considerations faced by buyers when making purchasing decisions, herbal producers can better evaluate potential barriers, and decide how to enter the market at a scale appropriate for their operation.

Snapshot of the Herbal Supply Chain

Some distribution channels are very direct: for example, fresh basil sold at the local farmers market or roadside stand. Others are extremely complex supply chains: for example, elderberries, where multiple wild harvesters sell to a consolidator, who sells to a processing facility, who uses a broker to move the material to a foreign market where it is processed into an extract, then sold to a brand name retailer who has it sent to a tabletizer. The tabletizer makes the pills and custom packages them into the bottles that are shipped to a warehouse, then onto a retail store, where they are finally bought by the end user.

Botanical sources can be broken down into two general types – wild harvested and cultivated. For most botanicals, wild harvested volumes are much higher than cultivated botanicals so pricing is often established based on the wild harvested supply. The fact that wild harvesting typically requires little capital expenditure and is typically supplemental income – not the only source of income – for collectors keeps the price of these herbs relatively inexpensive when compared to the same botanicals when cultivated. This often creates a barrier to cultivating many herbs for the open market.

The following chart gives an overview of the different players in the herbal supply chain. Many companies are a combination of one or more of these. This is also true of wild harvesters and farmers, who may have a retail line of their own, but then sell to the open market as well.

The supply chain is very complex and the different markets available to raw material suppliers can be broken down in many different ways.

Balancing Purchasing Priorities

Typically, companies that trade in botanicals want to buy directly from the source of the raw material. The traceability of the product is simplified, quality issues can be dealt with directly with the company or person that was responsible for the quality in the first place, and it makes for good marketing. However, buying direct from the original source is not always possible or cost effective. If a buyer’s demand is greater than what the supplier can provide, then the buyer has to find another supplier, or several suppliers. Each supplier will need to be approved as a vendor and managed in some way, and each lot of material provided from each supplier must go through the same quality control checks. At a certain point, this becomes unmanageable. There are too many small suppliers and too many small lots for a given company to manage or afford to manage. Either you find a direct source supplier that can provide all or most of your needs for that given product or you find a broker or wholesale trading company that can do so. If you are a company that deals in multiple products, especially products that grow in different climatic zones, then you need to have a global supply network to establish and maintain consistent supply. With increases in extreme weather events, political and economic unrest and increased regulatory requirements, often it is necessary to have multiple sources that can supply the entire quantity and quality requirements for the same product just to assure supply. This again requires more management and increases cost for the buyer.

The price point of a product is often contingent on the global economy of scale for a particular botanical and how much capital a producer has to invest in producing the crop, then processing it to an acceptable form. In agriculture, efficiencies can be achieved by mechanization. While land and mechanization requires investment – which can often a barrier – it allows producers to farm more ground with the same labor force and infrastructure, thereby achieving greater economies of scale. However, sometimes the price the consumer is willing to pay is below the cost of production for some suppliers. This often has little to do with a botanicals company’s desire to buy from a given supplier or type of supplier, but more about the economic realities of the global market in which everyone is participating.

Purchase Price vs Production Values

Let’s take the example of dried organic hyssop, Hyssopus officinalis, to illustrate how global pricing affects domestic pricing, as well as how economy of scale works. A given botanical company has a market for 10,000 pounds of hyssop per year. In order for them to meet a price point for their product that the end consumer is willing to pay, they can’t spend more than $6.00/lb for raw material. To assure supply, they split the purchase of material between several suppliers. One is a wholesale distributor who brings the material in from Europe at a cost of $2.95/lb. A second is a larger domestic farm who sells the material for $8.50/lb. The third is a small-scale domestic grower who has offered product at $15.00/lb. The larger domestic grower who sells for $8.50/lb has 50 acres and will put in 5 acres of hyssop and harvest around 10,000 lbs of finished product off of that acreage. This farm calculates that if they make $15,000 gross per acre they will be profitable. The smaller domestic grower is farming 15 acres and put in ½ acre of hyssop. They will get the same yield per acre, so will have 1,000 lbs of hyssop to sell. However, due to their small acreage they need to make $30,000 gross per acre to be profitable. The domestic materials are much higher quality so the buyer wants to buy more product from the domestic growers. Supporting the small grower may have future benefits such as having another potential source and supporting small family farms, however buying a small amount costs more per pound and the total quantity available for purchase is quite low. The testing required for larger lots is also required for smaller lots as well, increasing the overall cost per pound even more. In this example, the small grower doesn’t have the same equipment as the larger domestic producer, and though the quality of the finished product is superior in terms of color and oil content, it also has more stem requiring a further processing step on the part of the buyer, and further increasing the overall cost.

What is the botanical company to do? Philosophically, they would like to support the small grower, but in order to keep their average price per pound paid at $6.00 per pound; they would have to purchase more of the wild-harvested product from Europe at the lower price. Sacrificing overall product quality to support the small grower is a possible outcome of this example. In the case where wholesale buyers prioritize product values and quality over price – as in the above example of the grower with the smaller economy of scale – it is essential that consumers appreciate and recognize the benefit.

Approaching Buyers in Your Niche

For a grower, finding one’s niche in the complex botanical industry is not easy. Quantity, quality, price and business practices all play a part in aligning buyers with producers. Quality is often defined by the end use of the botanical. Companies who trade in standardized products require the raw material they buy to have those constituents their products are standardized to in high enough quantities to be economically viable. In this instance, color and flavor are not the indicators for quality they are ultimately concerned about, although these may be indicators of quality. Retailers of dried botanicals are typically interested in not only what the botanicals tastes and smells like, but also what it looks like. Medicinal herbs need to be efficacious and often not only organoleptic qualities are scrutinized, but chemical and microbiological considerations come into play as well. So how does one find those organizations that align with what you have to offer or what they need to procure?

• Before you even approach a potential business, know what you excel at and what you can provide in terms of quality, volume and price. Knowing your range of capabilities before going into discussions with potential businesses can make a big difference in how initial conversations go.

• Go local first. Having face to face relationships with organizations in your area not only creates a more solid relationship, it is also more environmentally and economically sound. Often economies of scale can align or be brought into alignment when local producers and buyers work together.

• Look at the industry trade association’s websites or better yet, join them. They support the industry with things like information, research, legislative reform, et cetera. Some of these include: American Herbal Product Association, American Botanical Council, and Natural Products Association. From these sites you can find other organizations in the herbal and botanical fields.

The diversity of the botanical industry in terms of raw material suppliers and finished product sellers allows providers and consumers choice in products they can buy and sell. At times economies of scale and qualities do not align between buyers and sellers and compromises must be reached in order for business to be transacted. Educating the consumer about the different choices available to them, the value in buying local and the cost that environmental, social and economic justice can have on product cost is necessary for true understanding. Supporting each other in the production of healthy, high quality botanicals that provides a living wage for everyone in the supply chain is a worthy effort and one that takes understanding. May the outcomes of our work reflect that understanding.

• Supplement to Understanding Opportunities for Elderberry Sales webinar, April 2020