Jean-Marie Codron/ Eric Giraud Heraud /Louis Georges Soler/ INRA France Montpellier/Paris

1. CODRON: CODRON: CODRON: French Large-Scale Retailing and New Supply Segmentation Strategies for Fresh Products (Meat and F&V) Jean-Marie Codron/ Eric Giraud Heraud /Louis Georges Soler/INRA France Montpellier/Paris Washington, February 14th

2. Introduction • Retailer brands (RB) are quite new in France, in the meat and fresh produce sectors • food scares and environmental concerns have led retailers to create their own brands • RB in fresh products aim at • providing consumers with safety and quality guarantees • creating value rather than increasing their bargaining power • RB strategies differ • Over countries • Over categories of fresh products

3. Plan • I. Segmentation strategies : more advanced in meat than in fresh produce • II. Impact on supplier relationships: towards more cooperation • III. Segmentation and Standards : retailers play a strategic role

4. I a : segmentation in the meat department Price Organic Labels of producers 120-140 « Chain » Private Labels 110-120 Food Safety Quality Environment « Substitution » Private Labels <105 Food Safety Quality Standard 100 Food Safety

5. I a : segmentation in the meat department Prices Carrefour FQC (Chain RB) « Jean Rozé » (Substitution RB) Intermarché Standard 0% 100% Shelfspace sharing

6. I b . Segmentation in the F&V department • Substitution RB • quite new, less % of shelfspace than for meat • price differenciation is almost absent • false segmentation (only 1 SKU by type or variety) • RB are launched thanks to the IPM movement • Environmental quality is put to the fore front • Food safety (pesticides residues) is implicit • Organoleptic quality remains the main focus

7. I.c: comparing segmentation in the meat and F&V departments • Similarities • Due-diligence requirement (Food Safety Act in UK 1991, hygiene law in EU 1993, NRE law in France 2000) • Key departments for consumers to choose a retail outlet

8. Meat Fruit and Vegetable Sanitation crisis Open Not yet Consumer perception Well informed  Poorly informed Quality main focus Innocuity (credence) Taste and conservation (experience) Supply constraints Weak Strong (Volume/quality fluctuations) Distribution constraints Easy (prepacked) Complex (bulk service) I.c: segmentation in the meat and F&V departments : comparison • differences

9. Producers Two party contracts - Specification owned by the retailer - Retailer Control - Selection/Sorting logic Slaughterer Retailer Three party contracts - Co-design of the Specification by the association - Third Party Control - Partnership Producers Slaughterer Retailer II a . Impact on Vertical Coordinationin the meat industry

10. II b: impact on vertical coordination in the fresh produce industry • although RB are mostly of the substitution type • Classical contracting is not the only governance structure • mix of partnerships and classical contracting • Adverse selection is the main reason for partnership • adverse selection is a major issue for retailers who try to build a reputation in their F&V department • Long term agreements are an efficient governance structure to solve this contractual hazard • This is true with or without RB

11. II b: impact on vertical coordination in the fresh produce industry • RB must solve another contractual hazard • compliance with the new specifications (GAP and IPM) is not easy to measure; • two alternative strategies to reduce TC (adverse selection + moral hazard) • classical contracting: minimizing control costs • partnership: control + learning which allow for better quality

12. II c: what can we infer from the two cases? • Creating value rather than bargaining power • no grower brand, high fragmentation at the grower level • creating value to increase consumer loyalty rather than trying to extract higher surplus from the grower • cooperation will be more likely when • there is potential for quality improvement • quality enhancement is a shared goal (a priority on both sides) • organizational features are favorable both on the grower and the retailer side • Thus cooperation is not a unique function of RB • Cooperation also depends on standards

13. III a: Segmentation and standards • Public standards are questioned or weakened by • Food safety crises and consumer distrust • globalization and the rise of private standards • consumers new expectations • retailers adapt to the evolving public standards • by adjusting segmentation (meat) • by creating or integrating alternative standards (fresh produce)

14. III a: Segmentation and standards in the meat industry • Classical configuration • a single public minimum quality standard • clearly perceived and trusted by consumers • Upgrading the public standard • Raises differentiation costs • Leads retailers to segment more toward niche markets and less toward the back of the shelf • Hence to pull away from their upstream partners • Due to their economic weight and influence on consumers, retailers influence public standards

15. III b: segmentation and standards in the fresh produce industry • Complex configuration • An international market where public and private standards coexist • With little transparency for consumers (communication on MLR is forbidden) • To bypass such a prohibition • Retailers adopt IPM standards • Among the many private standards, EUREP GAP is the more extensively adopted; • Two attitudes as regards to EUREP GAP • Adopt the standard so as to minimize control costs and differenciate on the sole basis of organoleptic quality • Keep away from Eurep so as to be able to differentiate at lower costs and not only on the basis of quality

16. Conclusion • Meat and fresh produce sectors have long been reluctant to branding • Retailers’ own brands are now soaring • Along different strategies: substitution vs chain RB • Leading to significant change in VC • However, segmentation is still fragile and reversible • Segmentation on food safety will depend on changes in the level of consumer distrust • Segmentation on the basis of organoleptic dimensions is still costly, especially on ”picky” consumers’ markets