Marketing Trends andtheir Implications

Marketing Trends andtheir Implications

Dr. Roberta CookDept. of Agricultural and Resource

EconomicsUC Davis

January 2004January 2004

Overview of Presentation

• Industry size and structure• Retail consolidation andchanging procurementpatterns

• Major challenges and futuretrends

$485.152 billion food retailing (excluding non-food grocery store sales)

54% of total32,981 supermarkets127,000 total stores selling food including83,500 convenience stores; 1148 membershipclub stores; and 1777 SupercentersSupercenters contributed 11% of retail foodsales

$414.957 billion food service46% of total844,000 outlets

TOTAL 2002 U.S. FOOD SYSTEM*:$900.109 BILLION

*Excludes alcoholic beveragesSources: ERS/USDA and The FoodInstitute

The Revealing PercentagesConven’l Super Disc. ClubGrocery Center Drug Store

Gross 25.3 25.0 20.0 11.0Oper Exp 21.8 17.5 16.0 7.5

Net Margin 3.5 7.5 4.0 3.5 (Before taxes)

Source: Glen Terbeek

• Mass Merchandisers, especiallySupercenters, led by Wal-Mart:Driving non-value-adding costs out ofthe systemContracting with preferred suppliersCo-Vendor-managed AutomaticInventory Replenishment – sharedresponsibility for growing the category

New players playing by new rulesdrove retail acquisition trend

Percentof U.S.grocery

storesales

010203040506070

1987 1993 1995 1997 1999 2001

Top 4Top 8Top 20

U.S. Food Retail ConcentrationTwenty largest food retailers captured 57%of total grocery store sales in 2002P

P PreliminarySource: ERS/USDA and Census, modified by Cook

314557

2002P

LARGEST U.S. FOOD RETAILERS,2002

1Groceries only; Italics=foreign-ownedSource: Supermarket News, March 2003

rank company # stores sales ($B)1 Kroger Co. 2,461 $51.82 Albertson’s 1,346 $35.73 Safeway 1,793 $32.44 Wal-Mart Supercenters 1,243 $29.31

5 Ahold USA 1,633 $25.16 Publix 739 $15.9

LARGEST U.S. FOOD RETAILERS, 2002

Source: Supermarket News, March 2003

rank company # stores sales ($ B)7 Del Haize America 1,485 $15.08 Winn-Dixie 1,073 $12.29 Supervalu1 1,395 $9.81

10 Great A & P2 626 $8.311 H.E. Butt2 284 $9.012 Meijer3 156 $5.0

1Corporate and licensed stores only; italics=foreign-owned2Excludes Canada or Mexico 3Groceries only

2002 Market Share of the Top 5 Retail Chains Per Selected Country, % of Supermarket Sales

Top 20 Europe-wide share about 60% in 2002

99%97%

93%87%

85%81%80%

77%76%

73%67%

64%

36%47%

USABrazilUnited KingdomSpainGermanyArgentinaHungaryMexicoFranceBelgiumNetherlandsSwitzerlandNorwayGuatemala

USABrazilUKSpainGermanyArgentina and PortugalHungaryMexicoFranceBelgiumNetherlandsSwitzerlandNorwayGuatemala and Sweden

Source: M+MPlanetRetail andReardon

Source: M+MPlanetRetail andReardon

• Operates in 10 countries, largest retailer inworld, $244.5 billion in 2002 sales

• Wal-Mart has 75% share of US 2002supercenter sales

• Over 1333 supercenters in US in 2003• Opening 200/yr supercenters.; projected to

reach 2000 by 2006 in the US• Plus 52 neighborhood markets• Opening 40 supercenters in Ca. over the

next 4 to 6 years

Wal-Mart plays a Dominant Rolein Global Grocery Industry

Bottom LineWal-Mart will dominate mainstreamretailing for years to come, but newformats will emerge and competesuccessfully. Successful formats willdefine their opportunities in contrastto Wal-Mart, finding “white space”where they can out-price or out-differentiate it.

Source: Bishop Consulting

Wal-Mart Effects• On the up-side:

– Many suppliers have seen profitable volumegrowth working with Wal-Mart, making ittheir most profitable customer.

– They have developed supply chain bestpractices that have been leveraged acrossmany other customers.

– They’ve created blueprints for customerbusiness team success.

Source: Bishop Consulting

Wal-Mart Effects• On the down-side:• Some suppliers have come to rely heavily on this

massive customer, generating financial risk. Manylarge CPG manufacturers sell Wal-Mart 25% ormore of their total volume.

• Plus, many of Wal-Mart’s major retail competitorsare struggling, placing volume and margin pressureson CPG suppliers who depend on other customersthriving over the long-term.

Source: Bishop Consulting

Future WinnersLimited assortment stores (LAS) aretotally integrated from procurement throughmerchandising. They are optimized for lowestcost, and can offer consumer prices 10-15%below Wal-Mart’s. They have effectivelycompeted because they maintain total controlover every operational aspect, relying verylittle on suppliers in direct contrast to Wal-Mart.

Source: Bishop Consulting

Future WinnersDollar stores also compete effectively withWal-Mart on price. In an effort to generatetrip frequency, expect to see more regularly-stocked items, especially food, and likelyeventually fresh produce. Also expect suppliersto create product specifically to meet dollarstore price points. Recognizing, then investingin growth formats is critical to CPGmanufacturer share positions.

Source: Bishop Consulting

Future WinnersTrader Joe’s creates unique foodproducts under their own brand. Thecombination of convenient, high-quality, great-tasting products withoutstanding value results in a highlydifferentiated offering with broadconsumer appeal: upscale and down.

Source: Bishop Consulting

Future WinnersWhole Foods features organicsincluding fresh produce and meat andpoultry that appeals to health-consciousconsumers. They combine “natural”with premium, differentiated offeringsin all categories.

Source: Bishop Consulting

US Fresh-cut Produce Sales Trend,All Marketing Channels, $ Billion

Source: DoleSource: Dole

6.03.3

15.011.0

9.07.1

02468

10121416

1994 1997 1998 1999 2000 200560% sold via foodservice channels vs. 40% via retail Source: IFPA

$ billion

Median Company Identical Store SalesMedian Company Identical Store SalesGrowth Growth (Food Marketing Institute Speaks 2003)(Food Marketing Institute Speaks 2003)

*Real dollars are computed using annual percent increase of CPI*Real dollars are computed using annual percent increase of CPIfor food-at-home.for food-at-home.

2.6%

0.7%

2.7%

0.8%

1.8%

-0.5%

2.2%

-1.1%

2.4%

1.1%

-2%

-1%

0%

1%

2%

3%

1998 1999 2000 2001 2002

Current Dollars Real Dollars*

The consumer shift to value– Consumers no longer view

supermarkets as the “One StopShopping” outlet for groceries.

– Now even Value Retailers like clubstores and supercenters havebecome frequented as more thanstock-up shopping opportunities.

The consumer shift to value– Value retailers have out-executed

their competition and moved beyondprice as the sole point ofdifferentiation.

– Value retailers (including dollarstores) now represent 17% of theentire US retailing sector, excludingautos, the fastest growing part of allretailing.

Competing in a Value-Driven Market

• Channel blurring has caused the retaillandscape to be overstored.

• Plus, foodservice channels compete withall forms of food retailing which tend tooffer ingredients to prepare instead ofmeals to eat.

• Retail Home Meal Replacement helpingsomewhat and fresh produce value-addedproducts benefiting.

Competing in a Value-Driven Market• Grocery retailers have been losing share to

foodservice for decades, now to value retailers• Conventional grocery retailers must identify

value propositions they can own if they are toremain competitive! (fresh produce can be apoint of differentiation)

• Bottom line: more structural change expectedin the US grocery industry and more pressureon suppliers!

US Chains: Impact of RetailConsolidation on The Buying Process

• Multiple buying offices now merginginto fewer or one– Purchase from shipper without seeingthe product

– More emphasis on standards, less onprice

– Synergy contract buying– More emphasis on forward planning– Buy more directly from shippers

Sources: PMA Fresh Track 2001; Cook and misc.

-Ahold – ending Division buying, centralizing to 2 or 3 preferred suppliers chain wide

-Safeway – centralized merchandising to Pleasanton, Ca.,

buying to Phoenix-Kroger – consolidating divisions and centralizing buying to Cincinnati

US Chains: Impact of RetailConsolidation on The Buying Process

Key Trends in the FreshProduce Industry

• Supply chain management (SCM) isbeginning to replace thetraditional, fragmented, dailysales orientation of the freshproduce business with partnershipsfocusing on year-end net results

Produce Business Model 1960 tomid-90s: “Distribution-Based

Strategy”Commodity Approach

Retailer orWholesaler

1 2 3 4 5 100...

Uniformoffers.Focus on foodads to boostshort-termsales, respondto inventoryissues.

Relationship selling.Fight for bestposition.Exploit seasonality.

Fax Machine MarketingSource: Adapted from The Perishables Group

New Produce Business Model, 1998…Suppliers Retailers know the

value of ads, space, location, etc. Expect suppliers to know consumers:•Right product•Right stores•Right time•Right price

NEW MODEL “B” RETAILERSConsumer Information.Category Expertise.Category Development.

New Strategy--Cover Both

TRADITIONAL “A” RETAILERSBid for orders.Buy ads, fight for space.Tactical approach.

1 KeyPartner

KeyPartner

KeyPartner2

Source: Adapted from The Perishables Group

… …

Shippers becoming the buying agentsfor retailers

•Offering year-round supply, including via directimports where necessary.•This is posing new competitive challenges togrowers and shippers in smaller early seasonareas, like the case of the California apple andpear industries. Small volume late seasonsuppliers may become even more redundant –unless they add value!•May also affect conventional importers.

Percent of US Retailers with ProduceCategory Managers by Firm SizePercent of US Retailers with ProduceCategory Managers by Firm Size

Source: PMA Fresh Track 2001

23.5

83.358.5

020406080

100

up to $1.5 B > $1.5 B all retailersup to $1.5 B > $1.5 B all retailers

%

Sources of Produce (% of purchases), USRetailers with Sales over $1.5 billionSources of Produce (% of purchases), USRetailers with Sales over $1.5 billion

Source: PMA Fresh Track 2001

4.1

29.5

54.2

0.7

3.2

7.7

24.7

63.6

1.0

3.711.7

0.6

7.1

20.8

67.5

200620011996

Direct fromgrowers/shippers

Brokers

Producewholesaler

General-linegrocery

wholesaler

Other

Direct fromgrowers/shippers

Brokers

Producewholesaler

General-linegrocery

wholesaler

Otherpercent of produce purchasespercent of produce purchases

Sources of Produce (% of purchases), USRetailers with Sales up to $1.5 BillionSources of Produce (% of purchases), USRetailers with Sales up to $1.5 Billion

Source: PMA Fresh Track 2001

1.1

27.4

24.7

2.9

43.1

20.2

33.8

2.946.8

40.3

15.5

41.3

200620011996

Direct fromgrowers/Shippers

BrokersProduce

wholesaler

General-linegrocery

wholesaler

Direct fromgrowers/Shippers

BrokersProduce

wholesaler

General-linegrocery

wholesalerpercent of produce purchasespercent of produce purchases

Sales mechanisms for eachmarketing channel –1994 & 1999 - %Grapes, oranges, grapefruit and CA/FLtomatoes

Mass MassAll All Retail Retail Merch Merch

1994 1999 1994 1999 1994 1999

Mass MassAll All Retail Retail Merch Merch

1994 1999 1994 1999 1994 1999

Daily Sales 72 58 57 43 20 7

Advance Sale 19 24 30 42 19 23

Sht-t. Contract 7 11 12 11 48 41

Lng-t. Contract 2 7 1 4 13 29

Source: Economic Research Service, Produce Marketing Study Interviews1999-2000

Sale Type

Source: PMA Fresh Track 2001

smaller inventory fewer invoice disputes reduced transaction

costs better delivery

scheduling more targeted customer

promotions

smaller inventory fewer invoice disputes reduced transaction

costs better delivery

scheduling more targeted customer

promotions

For RetailersFor Retailers For SuppliersFor Suppliers

Supply Chain of the Future: Benefitsof Scan-Based Trading in ProduceSupply Chain of the Future: Benefitsof Scan-Based Trading in Produce

smaller inventory fewer disputes, quicker

payment reduced transaction

costs

smaller inventory fewer disputes, quicker

payment reduced transaction

costs

How to handle shrink?!

Demand Based Management(DBM)

• Understanding consumer demand isthe only untapped resource left

• DBM is enabling retailers to tap thisresource

• The rate of adoption of DBM ispredicted to be rapid, however, asalways, produce will lag itsintroduction in the rest of the store– random weight remains a barrier

Types of Fees & Services Requested

Slotting EDI

Volume Rebates Displays

Non-volume Rebates Private Labels

Promotional Ads Returnable Containers

E-commerce fees Special Packs

Capital Improvements Food SafetyCertification

Fees are increasing for all fresh produce butcommodities are still differentCommodities

• No slotting fees• Other fees well under 2 percent of sales• Volume incentives, promotional allowances and rebates

Fresh-Cut• All fees approximately 1 to 8 percent of sales• Slotting fees, promotional allowances, volume

incentives, and rebates – firms offer options• Can cost up to $2 million to acquire the business of a

national chain; $500,000/division

U.S. Market Shares of Fresh Cut SaladFirms, Dollar Sales

*Private label share ranked third in 1999 vs. 6th in 1994. Source: IRI

Top 5 firms91.2%

Top 5 firms87.6%

Private labelshare 2.4%

Private label share 9.7%

Other share 6.4% Other share 2.7%

1994 1999

SHELF CAPTAINS• Leading, technologically savvy

vendors—sometimes brokers• Take category interface

responsibility for section• May work in retailers’ headquarters• Recommend shelf sets, product

placement• Very influential to category

management

Building Retail Partnerships

Effective TacticsShopper Savvy

Loyalty Card Better Systems

Results-driven Tracking Focus

Dept. ProfitabilityStrategic Approach

CategoryDevelopment

Best PracticesStore-level

ResearchPurchase TriggersConsumer DriversLong view

Fact-based SellingInnovativeMarketing/MerchandisingEfficient Practices“Category” vs.“Item” Perspective

Retailer/ Wholesaler Grower/Shipper Boards/Commissions

• Roles and Responsibilities

Source: Adapted from The Perishables Group

•Low-cost producer/shipper•Differentiated producer/shippermarketing a premium product orproduct with identifiable preferredcharacteristics that are commerciallyperceived and valued•First strategy increasingly difficult asbuyers push more demands and servicesupstream to suppliers

Two Basic Strategies

Conclusions• Adoption of SCM is not uniform acrossthe vertical fresh produce distributionsystem: Both the new and old businessmodels exist side-by-side with manyfirms in-transition

• So mixed short-term signals but clearlong-term trends!

• Smaller seasonal players will need tofind niche markets.

• Strategic alliances and joint venturesare being explored as alternatives

• Supply side consolidation and year-round marketing presence may makelarge shippers more susceptible tofees, including slotting fees. Thiswill depend in part on shipperstrategies, which are influenced byinter-firm rivalry and market shareissues. It also depends on whetherthe Wal-Mart procurement modelbecomes the norm.

CONCLUSIONS: The Future?